March 03, 2021
by Katherine Cooper

The New York Attorney General’s Office has sued Coinseed, Inc., a start-up virtual currency trading platform, and its CEO and its former CFO under New York State’s Martin Act in Manhattan State Supreme Court.1,2  Specifically, the AG alleges that Coinseed violated the Martin Act by selling its "CSD tokens" that were illegal, unregistered securities, defrauded its customers by misrepresenting the financial services experience of its management team and the full extent of the fees it charged for trading virtual currencies, and operated as an illegal, unregistered commodities broker-dealer.

Coinseed offered a mobile phone application that functioned as a virtual currency trading platform.  Coinseed raised capital to support its business through the sale of its CSD token.  Coinseed’s offering of the CSD token was unregistered and Coinseed was not registered with the AG’s Office as a broker-dealer.  Coinseed’s mobile application rounded up its customers’ everyday purchases on their linked credit cards to the nearest dollar, and when the total balance of the "round-ups" exceeded five dollars, the platform bought virtual currencies of the customer’s choosing.

The AG’s allegations of Coinseed’s sale of an unregistered security token and misrepresentations regarding the management team’s financial services experience and failure to disclose mark-ups that Coinseed charged its customers have become fairly standard fare in the regulation of certain fintech startups.  What is novel, however, is the AG’s allegation that Coinseed operated illegally as an unregistered commodity broker-dealer.

The Martin Act requires

Any person acting as a commodity broker-dealer, commodity salesperson or commodity investment advisor and any person who manages or supervises any such broker-dealer, salesperson or investment advisor shall file a registration statement with the attorney general as a commodity broker-dealer, commodity salesperson, or commodity investment advisor relating to the activity actually engaged in.3

It defines a "commodity broker-dealer" as "any person engaged in the business of selling or offering to sell commodities through commodity contracts to the public within or from the state of New York."4  The Martin Act provides that the term "commodity contract" means:

any account, agreement or contract for the purchase or sale of, or any option or right to purchase or sell, primarily for speculation or investment purposes and not for use or consumption by the offeree or purchaser, one or more commodities, whether for immediate or subsequent delivery or for storage and whether or not delivery is intended by the parties, and whether characterized as a cash contract, deferred shipment or deferred delivery contract, forward contract, futures contract, installment or margin contract, leverage contract, option, privilege, indemnity, bid, offer, put, call, advance guaranty, decline guaranty or otherwise. Any commodity contract offered for sale or sold to a person other than a producer, processor, merchant, handler, commercial user or ultimate consumer of the commodity shall, in the absence of evidence to the contrary, be presumed to be offered for sale or sold for speculation or investment purposes.5

Finally, the Martin Act defines the term "commodity" to mean:

except as otherwise specified by the attorney general by rule, regulation or order, any agricultural, grain, animal, chemical, metal or mineral product or byproduct, any gem or gemstone (whether characterized as precious, semi-precious or otherwise), any fuel (whether liquid, gaseous or otherwise), any foreign currency, and any other good, article, or material.6 

Failing to register when required as a commodity broker-dealer is a fraudulent practice and a crime under the Martin Act.7  Banks and trust companies, as well as, registrants with the Securities and Exchange Commission and the Commodity Futures Trading Commission are exempt from the registration requirement.8  

Last summer, the Appellate Division of the New York State Supreme Court, First Department, ruled that virtual currencies are "commodities" under the Martin Act.9   As a result, it appears that it is the NY AG’s position that anyone in the business of dealing in "commodity contracts" involving virtual currency "within or from the state of New York" is required to be registered with the NY AG’s Office.10  

This may come as some surprise to Bitlicensees who have navigated the complex and lengthy application process to operate a virtual currency business in New York and obtained the required money transmitter license with the New York Department of Financial Services.  Even though they have a Bitlicense, it would appear that the First Department’s holding that virtual currencies are commodities for purposes of the Martin Act means that they must also be registered as a commodity broker-dealer with the Attorney General’s Office, and if not, they are committing fraud and a crime.

A reasonable amendment to the Martin Act would be to exempt Bitlicensees from the commodity broker-dealer registration requirement.  The AG could retain jurisdiction over fraudulent activities.11   In the interim, hopefully the Attorney General will use her prosecutorial discretion to not prosecute Bitlicensees for the technical failure to register as a commodity broker-dealer unless there is also indicia of fraud or other scienter-based wrongdoing.

1 Press Release: Attorney General James Sues to Shut Down Illegal Cryptocurrency Trading Platform and Virtual Currency, Seeks to Recoup Defrauded Funds for Thousands of Investors (NY AG Office Feb. 17, 2021) available at:

2 The SEC filed a parallel enforcement action in the Southern District of New York:  SEC v. Coinseed, Inc., Dkt. No. 1:21-cv-01381 (S.D.N.Y. Feb. 17, 2021).

3 N.Y. Gen. Bus. L. § 359-e(14)(b); 13 NYCRR § 13.2. 

4 N.Y. Gen. Bus. L. § 359-e(14)(a)(iii).

5 N.Y. Gen. Bus. L. § 359-e(14)(a)(ii).

6 N.Y. Gen. Bus. L. § 359-e(14)(a)(i).

7 N.Y. Gen. Bus. L. §§ 359-e(14)(j), (k) & (l).  

8 N.Y. Gen. Bus. L. § 359-e(14)(g).

9 James v. iFinex, 185 A.D.3d 22, 28 (1st Dep’t 2020).

10 Industry Alert: Registration of Commodity Broker-Dealers, Salespersons, and Investment Advisors Doing Business Relating to Virtual or "Crypto" Currency, available at:

11 N.Y. Gen. Bus. L. § 352

About Blockchain Law Center

Blockchain technology utilizes a distributed digital ledger to record and track information, and can be leveraged to gain transparency and certainty in transactions ranging from cryptocurrency to supply chain tracking.  This blog provides information on the legal developments surrounding implementation of blockchain technology, with an initial focus on the financial services sector.