Bloomberg Law
Nov. 28, 2022, 10:00 AM

States Lead Crypto Enforcement as Feds Deal With Inchoate Role

Matthew Bultman
Matthew Bultman

The Texas State Securities Board’s investigators used to browse classified newspaper ads and monitor lunch seminars for investment scams.

Today, they are infiltrating chat rooms and using burner phones and fake social media profiles to root out fraud.

The high tech scope of their work, sometimes involving global players, was highlighted when Texas and four other states brought actions against a metaverse casino accused of running an NFT sales scam with alleged ties to Russia.

“There has been an absolute change in our work over the last couple of years, and I think it’s fair to say in state securities regulation,” said Joe Rotunda, the director of enforcement at the Texas agency, whose investigations and actions on digital assets account for about 10% of enforcement workload.

State securities regulators are taking on more ambitious roles in crypto enforcement as federal agencies grapple with the new technology and unclear jurisdiction. The SEC is expected to ramp up enforcement. But state regulators will continue to evolve to align their work with their federal counterparts, industry watchers say.

States brought 89 enforcement actions in 2021, a 71% year-on-year increase, according to a recent report by the North American Securities Administrators Association (NASAA). The number of new investigations launched by states rose to nearly 215 last year from 125 a year earlier, the report said.

The Securities and Exchange Commission, by comparison, brought a total of 97 crypto-related enforcement actions from 2013 through 2021, according to Cornerstone Research.

“There’s a question of familiarity with the asset class, which everyone is developing at the same time, state and federal,” Scott Wilson, co-head of the State Attorneys General practice at DLA Piper LLP (US), said. “There’s a great deal of interest and more is coming.”

The SEC declined to comment.

Localized Fraud

States largely began their crypto enforcement around 2018, as part of the NASAA’s “Operation Cryptosweep” that resulted in dozens of enforcement actions.

It “really marked when the states got into the crypto enforcement space in a big way,” said Andrew Jennings, a Brooklyn Law School professor who has studied state securities regulation.

States’ work includes policing localized fraud, like invest-in-crypto enticements on dating apps. But Texas and some other states have also led the charge on national-level issues, including sprawling investigations into bankrupt crypto lenders Celsius Network and Voyager Digital Ltd., and crypto platform BlockFi.

State regulators, sometimes referred to as the “local cops” on the securities beat, have helped fill what some view as a vacuum created by federal regulators moving slowly to protect investors.

Policing crypto assets are pushing state regulators out of their comfort zone. Probe targets can be outside of the US, while the technology requires expertise and access to new tools.

“We are seeing a steady increase in the resources expended in these investigations—both in terms of time spent by investigators and attorneys, and in new tools needed to pursue these actions, such as cryptocurrency tracing software,” said Jonathan Williams, assistant deputy attorney general in South Carolina.

But states are pushing on despite challenges. In a recent NASAA survey, the majority of states identified digital assets as a top investment threat.

New York’s attorney general Letitia James this summer issued an alert urging crypto victims in the state to contact her office.

In California, regulators are investigating companies that offer crypto interest accounts. The New Jersey Attorney’s General Office’s this summer hosted a crypto enforcement webinar for regulators and authorities.

A number of states “are getting a whole lot of complaints” about crypto, Lori Kalani, co-chair of Cozen O’Connor’s State Attorneys General practice, said.

“You pile on with all the press that’s been out there, I think that more states are going to sit up and take a look,” Kalani.

The metaverse casino, Flamingo Casino Club, was accused of promoting fraudulent metaverse investments in NFT sales. Working with internet service providers and social media companies, states’ actions led to promotions being removed, Rotunda said.

“We may not be able to get the main actor when they’re acting offshore and running a scam,” said Rotunda, who is also vice chair of the NASAA’s Enforcement Section Committee. “But there are things we can do to protect people and keep them from actually offering.”

New York, which has become a crypto-mining hub, imposed on Nov. 22 a temporary ban on some mining operations. The measure is the first of its kind.

Evolving Roles

Crypto enforcement has in some ways crossed traditional boundaries. States have tended to focus on localized fraud or smaller scale violations, while federal regulators lead on national market issues, such as massive Ponzi schemes.

Texas started investigating FTX before the exchange’s implosion. It’s also currently probing celebrities like Tampa Bay Buccaneers quarterback Tom Brady for potential securities-law violations tied to their TX promotions, Bloomberg News reported.

States have also spearheaded enforcement actions against Celsius and Voyager, accusing them of selling unregistered securities.

BlockFi this year agreed to a settlement to end an investigation by dozens of states. The SEC joined the BlockFi settlement.

The Texas State Securities Board acted in the cases of Celsius, Voyager, and BlockFi because there was “no expectation the SEC was going to take action,” Rotunda said.

“I would not have filed those actions if the SEC was protecting those investors,” Rotunda said.

Regulators, including the SEC, are facing increased pressure in the wake of the high-profile collapse of FTX.

The SEC has shown signs of ramping up to become the primary crypto cop, nearly doubling its Crypto Assets and Cyber Unit by adding 20 people this year. Recent SEC public statements also attest to crypto emerging as an agency priority.

State regulators have indicated no interest in a turf war, or piling on with overlapping efforts.

“If I’m comfortable that Texas investors are going to be protected, I’ve got limited resources—we’ll go and take on another scheme,” Rotunda said.

Both state and federal regulators have roles to play in crypto enforcement and can cooperate further, Rotunda said. That could includes states tackling localized issues and frauds not large enough to attract federal attention.

“Demand for enforcement in this space is so great, there’s probably significant under-enforcement across the board,” Jennings said. “We are not at a point of saturation where agencies with overlapping jurisdiction are competing with each other for cases.”

To contact the reporter on this story: Matthew Bultman in New York at

To contact the editor responsible for this story: Roger Yu at