On July 27, New York Attorney General (AG) Letitia James submitted written testimony to the Senate Permanent Subcommittee on Investigations  urging Congress to strengthen oversight of the cryptocurrency market to protect consumers and investors from scams. Sens. Richard Blumenthal (D-CT) and Chris Van Hollen (D-MD) convened the forum to scrutinize President Trump’s alleged self-enrichment from cryptocurrency ventures and the purported risks the CLARITY Act presents without clear ethics and meaningful consumer protection provisions.

The AG stated that cryptocurrency fraud complaints to her office have almost tripled over the last three years, attributing the increase in part to various scams, including “pig butchering,” romance scams, and investment frauds often perpetrated by anonymous actors overseas. In her testimony, James argued that the CLARITY Act, which Congress is considering, and which would shift oversight of digital assets to the CFTC, “seeks to interfere with and preempt states’ investor protection laws as well as dilute” the office’s ability to prosecute fraud. James noted that state and local law enforcement agencies handle the overwhelming majority of criminal prosecutions nationwide, and she argued that the CLARITY Act would “neuter state and local law enforcement by preempting states and preventing them from fully prosecuting rampant fraud and violations of law by actors in the cryptocurrency marketplace.” The AG also recommended that Congress bar elected officials and federal employees from regulating industries in which they or their immediate family members hold a financial interest. She recommended that violators face disgorgement and civil penalties of $50,000 per violation, that the restriction last two years after leaving public service, and that state and local regulators be permitted to enforce it.

Further, James asserted that the SEC’s determination that a large share of cryptocurrency assets are not securities ignores contrary case law. She recommended that Congress require cryptocurrency platforms, including decentralized finance platforms, to comply with anti-money laundering and know-your-customer requirements, prohibit the conversion of untraceable cryptocurrency to U.S. dollars, and decline to exempt cryptocurrency from existing money transmission, commodities, and securities laws. The AG also recommended that Congress require platforms to engage in market surveillance and hold them financially liable for failing to protect consumers from fraud, similar to protections under the EFTA, and that Congress not preempt state securities and commodities registration, antifraud, and other unlawful conduct laws, leaving further preemption decisions to Congress rather than federal agencies.