State Law Showdown: New York vs. Wyoming
With some states prioritizing strict enforcement of cryptocurrency firms, will founders vote with their feet?
I started Brogan Law to provide top quality legal services to individuals and entities with legal and regulatory questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their start up mentality. To help my clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email aaron@broganlaw.xyz.
For the past few weeks, this Newsletter has touched on issues of federal law. This makes sense, as the Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC) have steered crypto industry enforcement over the past several years.
State law is also impactful, though, and could become more so. The Tenth Amendment of the United States Constitution is the “reserve clause” stating that “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” This means that in theory, states could have more ability to regulate crypto than the federal government. In practice, still, this clearly isn’t currently the case. Unless they happen to be located in a given state, crypto firms are fundamentally more difficult for local regulators to reach. They can also move easily between states, complicating enforcement.
This leaves states with different abilities to regulate cryptocurrency, and different philosophies underpinning that regulation. Some, like New York or California, will always find some share of the industry domiciled domestically, and so have relatively strong purchase to regulate.[1] Others, like Wyoming, seek to attract businesses by drafting favorable laws. This week we examine a few of those state regimes.
New York
New York has a long history as a financial regulator in the United States, bringing actions related to financial crimes since at least 1868, when Jay Gould fled the city for New Jersey in the wake of the Erie Railroad Scandal. The 1921 Martin Act gives the state Attorney General the power to “enjoin and prosecute conduct that is deemed detrimental to the investing public without a showing of the elements of intent or scienter.” The Attorney General also has broad power to investigate, expanding further the office’s authority to act as a watchdog.
The Attorney General is an elected office in New York, and Letitia James has held the office since 2018. In recent years, AG James has used this position to take an aggressive tack to crypto, notably bringing an action against the exchange KuCoin in March of 2023 that characterized ETH as a security. That case ended in settlement, but the aggressive position the AG has taken is nonetheless tone setting for industry participants in the state.
Separate from the AG’s office, the New York Department of Financial Services (DFS) has attempted to establish itself as the prudential regulator of the cryptocurrency industry. In June 2015, DFS issued New York Financial Services Law 23 NYCRR Part 200, which established the “BitLicense” Program. On its face the New York BitLicense is a laudable attempt to create a path to legitimacy for cryptocurrency entities. For those without licensure, It effectively prohibits any “Virtual Currency Business Activity” which includes storing, issuing or exchanging cryptocurrencies, but creates a path for entities to participate in these activities legally, something the federal government has resisted.
Practically, however, this is challenging for many business entities. The application process can take an extended period of time, and applications may not be granted. Only three entities have received licensure in 2024. In addition, the program requires entities post a surety bond of $500,000 at a minimum, which may be impossible for small firms and startups. While many such entities seek to operate in New York, as talented individuals are drawn from the state's massive financial and technology industries, they find that it is prohibitively difficult to operate legally within the state. Some choose to move to New Jersey, and many also choose to prohibit New York users in their terms of service, and/or geo-block users as soon as practicable. In this way, the state's attempt at regulatory enforcement may chill domestic growth of the industry, driving enterprise and entrepreneurship elsewhere.
Wyoming
It is reasonable to speculate that New York is able to pursue aggressive regulatory policy because its financial appeal is so great that highly talented individuals will choose to live there anyway (this is analogous to certain tax practices). Wyoming, despite housing some enclaves of the ultrarich, generally does not have this advantage. It is the least populous state in the country and its median household income is below the national average. In contrast to the skeptical approach New York takes, Wyoming has courted crypto by passing a series of laws designed to attract entities to the state.
These include creating a legal framework for Decentralized Autonomous Organizations (DAOs) to be recognized as non-profit entities or “decentralized unincorporated nonprofit associations” (DUNAs).[2] This could be extremely valuable for registered DAOs, by providing liability protection for members, something that some commentators speculate would not exist in the current structure. Some anticipate DAOs flocking to take advantage of the structure as a result.
Wyoming has also passed laws exempting so-called “utility” tokens from securities law (though the SEC may disagree and is not bound by any state law). The state also created a “Special Purpose Depository Institution” (SPDI), which is intended to create a safe haven for crypto banking. Many companies in the space still struggle to find consistent banking partners as some prominent firms face federal pressure for their crypto banking activities.
This is all part of a strategy to become “the Deleware of DAOs”. Anecdotally there is at least some evidence it is working, with major crypto firm Kraken opening an SPDI there.
All Except Inside the Gates of Eden
In some ways, the different state approaches end up creating the worst of both worlds. In New York, crypto firms face strict enforcement, but even in Wyoming, federal policy can kneecap novel development. Nonetheless, firms in challenging regulatory environments may consider voting with their feet and moving to states like Wyoming that support the industry.
Crypto-oriented voters in states like New York should consider the cost of reactive policies shutting out the industry. In the short term, these policies may appear to protect consumers, but long term development requires not just regulation, but innovation as well. Look at Europe. While it is a leading regulator—they brought USB-C cables to the iPhone after all!—the EU is home to limited new commercial activity. Only one of the 25 largest companies in the world by revenue is EU based as of 2024, despite being home to four of the ten richest countries in the world.
Of course, Europeans and New Yorkers may see this approach as creating a higher standard of living, but in the face of global competition, that might not be enough for long. Competition for commercial activity is particularly acute in the United States where companies can move between states relatively freely.[3] Times change quickly, just ask Detroit, Michigan or Youngstown, Ohio, where recession in major industries led to rapid population decline.
While these developments are ongoing, Brogan Law continuously monitors changes in local law to advise its clients to maximize their potential value while minimizing regulatory risk.
[1] This newsletter only examines New York regulation of cryptocurrency, and despite California and New Yorks similar reputations and market powers, their policies here vary greatly. California has, so far, been much more permissive of local cryptocurrency firms. While there was a law in the works to create a New York-style regime, it was vetoed by Gov. Gavin Newsom in 2022.
[2] One might wonder how “autonomous” they can truly be if some person is fulfilling administrative tasks on their behalf. But there’s no reason to be too persnickety about the nomenclature here.
[3] Unless you are TripAdvisor or, possibly, Tesla.
Brogan Law is a registered law firm in New York. Its address and contact information can be found at https://broganlaw.xyz/
Brogan Law provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.