New York Attorney General Letitia James on Thursday announced that her office had secured $4.3 million from Coin Cafe, a Brooklyn-based trading platform that promised investors free Bitcoin storage on company-hosted wallets but instead secretly charged them exorbitant fees.
Per the enforcement action, Coin Cafe will contact eligible customers and begin to refund all fees to U.S.-based investors who request a refund within the next year.
Coin Cafe defrauded hundreds of New Yorkers out of thousands of dollars with its deceptive marketing and due to a lack of effective regulation, she said in a statement. This is yet another example of why the cryptocurrency industry needs to be better regulated, just like any other financial institution where New York investors put their hard-earned money.
In early May, the OAG proposed legislation that would expand its oversight of the crypto industrya move that drew criticism from some onlookers, including New York Rep. Ritchie Torres (D-N.Y.), for threatening the jurisdiction of the states other crypto regulator, the New York Department of Financial Services.
New York operates with a dual financial regulatory system, with the OAG overseeing security and commodity markets, as well as anti-fraud enforcement, and the DFS overseeing banks and bank-like products. In 2015, DFS implemented the BitLicense virtual currency program, the first crypto regulation regime in the nation at a state or federal level.
Coin Cafe applied for a BitLicense in 2015, finally gaining approval in January 2023 while continuing to operate. Under New York law, broker-dealers with a BitLicense still must register with the OAG, which Coin Cafe failed to do.
According to the OAG, before receiving its BitLicense, Coin Cafe claimed to provide investors with free accounts and wallet storage to buy and hold Bitcoin. Starting in September 2020, the company began to charge users for its wallet service without informing them, increasing the fee four times. In the last instance, implemented in October 2022, investors were charged fees equivalent to 96% of their holdings, affecting more than 300 New York customers and wiping out hundreds of investor accounts. Meanwhile, Coin Cafe collected hundreds of thousands of dollars worth of Bitcoin.
When there are inadequate safeguards to protect consumers and investors, James said in the statement, Companies are able to take advantage of New Yorkers.
An OAG investigator opened an account in October 2022, buying $208 worth of Bitcoin over two separate transactions. In March, after Coin Cafe received a BitLicense, Coin Cafe charged the investigator $99 in fees without notice.
The BitLicense program remains a nation-leading example of crypto regulation as lawmakers continue to debate over legislation. Even so, an OAG attorney told Fortune last week that gaps still exist that lead to later enforcement actions. The legislation proposed by James earlier this month would focus more on consumer protection, as well as targeting the type of conflict of interest concerns that have plagued crypto firms like FTX. The bill would also codify the BitLicense into law, which former DFS superintendent Maria Vullo told Fortune would strengthen its authority.
Critics such as Torres argue that the legislation could preempt DFS oversight, while expanding the jurisdictional divides in New Yorks dual regulatory system, which he said could lead to turf battles.
