People Said New York Was Too Tough on Crypto. But Perhaps It's Been Right All Along

During the cryptocurrency frenzy of 2020 and 2021, it was common to see headlines and social media threads slamming New York's crypto regulations. Headlines like, "Kill the BitLicense" and "Is New York the Most Anti-Crypto State in America?" give you a sense of people's sentiments. 

Things look different today. Crypto prices have dropped dramatically. We've heard even more stories of crypto fraud, mishandling of client funds, and outright lying. And several key players face criminal charges. Put simply, the stricter regulation and enforcement that's in New York could have protected some of the investors who've lost money. 

New York's tough crypto stance

New York has been tough on crypto since the outset. It introduced the BitLicense in 2015 and now New York Attorney General Letitia James would like to see its rules become a framework for crypto regulation nationwide. Any crypto exchange that wants to operate in New York or serve its residents needs to have the BitLicense. 

Its critics say the license is expensive and requires too much paperwork. Crypto platforms need to show they have know-your-customer, fraud protection, and money-laundering processes in place. They need to hire a compliance officer. They also need to submit information about their financials and meet minimum capital requirements. 

It is a lot. But here's the thing. FTX, which collapsed so dramatically at the end of 2022, never got permission to operate in New York. Unlike me and over a million other people, New Yorkers aren't stuck wondering if they'll get any of their money back in the bankruptcy proceedings. 

The regulation doesn't only impact crypto exchanges. The state has only green listed a couple of cryptocurrencies. If an exchange wants to offer other coins or tokens, it has to follow a separate application process. This means New Yorkers have much more protection against scam coins and speculative cryptos than other Americans. 

New York's rules have insulated crypto investors from the worst of the crypto winter. Its regulations don't protect against volatility, which is part and parcel of crypto investing. But they do guard against a lot of the murkier aspects of the industry.

How investors can handle limited crypto regulation

If you only take one thing away from this article, let it be this: Cryptocurrency is not covered by FDIC insurance or SIPC insurance against platform failure. In fact, limited regulation means limited investor protection in several ways. Here are some ways you can protect yourself if you don't live in New York.

1. Only use exchanges you trust

Research any crypto exchange you're considering carefully before you deposit any money. Pay particular attention to any security issues, whether it has insurance against hacking, and what the platform says about how it will handle your assets. Fee schedules and a decent range of cryptos are important, but they mean nothing if the platform fails and you lose everything. 

Indeed, one good way to find a trustworthy exchange is to see if it has New York's BitLicense. The full list, which includes Coinbase, Gemini, SoFi, and Robinhood, is here. It's also good to check to see if the exchange has recent third-party audits -- essentially that an outside firm has checked it has the deposits and funds it says it has. 

2. Keep your assets in an external wallet

When you leave your funds on the crypto exchange where you bought them, you may lose everything if the exchange fails, gets hacked, or your account gets frozen. Look into setting up a crypto wallet that you control. I keep the majority of my assets in non-custodial crypto wallets. Some are in online hot wallets and the rest is in a hardware wallet that's not connected to the internet.

Be aware that crypto wallets can also carry risks -- not least that if you lose your security phrase, you could lock yourself out forever. There are billions of dollars worth of Bitcoin (BTC) locked in wallets that people can't get to. A lot of wallets are not as user-friendly as crypto exchanges, so there is a steeper learning curve.

3. Be wary of crypto earn products

There are a few different types of ways to earn money from your crypto. The most risky are the crypto lend-earn products, where platforms loan out your assets and pay you some of the interest. Terra's now-defunct Anchor Protocol promised APRs as high as 20%. The trouble with these platforms is that you don't know what they are doing with your money to generate those rates. That, and there's very little protection if the platform fails. 

Crypto staking is different. When you stake certain cryptocurrencies, you can earn rewards for tying up your assets and contributing to the security of the network. Unfortunately, some platforms use the word "staking" for any form of crypto earn program. Plus, the SEC believes many crypto earn programs -- including staking options -- are operating as unregistered securities. I am a fan of staking, but I'm holding off until things become clearer. 

Bottom line

I am still hopeful about the potential of blockchain technology to transform certain industries. I continue to hold a small percentage of my portfolio in crypto, but I'm also very aware that the industry faces significant challenges, including the limited investor protection. It's important to only invest money you can afford to lose and pay attention to the regulatory landscape.

It's worth remembering that you don't have to invest in cryptocurrency. If you are worried about the risks or aren't confident about creating a crypto wallet, crypto might not be for you. Consider other -- safer -- assets such as property, equities, bonds, or even commodities. Learn more about how to get started with investing here. And if you don't have a brokerage account, check out our list of top stock brokers for beginners.