
Dan Brecher
Counsel
212-286-0747 dbrecher@sh-law.comFirm Insights
Author: Dan Brecher
Date: October 15, 2018
Counsel
212-286-0747 dbrecher@sh-law.comThe New York Office of the Attorney General (NY OAG) recently published the results of its Virtual Markets Integrity Initiative, which examined the policies and practices of platforms used to trade virtual or “crypto” currencies like bitcoin and ether. The report warns that crypto exchanges may not be doing enough to protect customers from fraud, theft, and abuse. The NY OAG also referred three platforms — Binance, Gate.io, and Kraken — to the New York State Department of Financial Services (NYDFS) for potential violations of New York law.
In April 2018, the OAG launched the Virtual Markets Integrity Initiative (Initiative), a fact-finding inquiry into the policies and practices of virtual asset trading platforms. The OAG sent letters and questionnaires to thirteen major trading platforms, which asked the platforms to disclose information on six major topics, including (1) Ownership and Control, (2) Basic Operation and Fees, (3) Trading Policies and Procedures, (4) Outages and Other Suspensions of Trading, (5) Internal Controls, and (6) Privacy and Money Laundering.
The initiative specifically sought information regarding the platform’s approach to combating suspicious trading and market manipulation; their policies on the operation of bots; their limitations on the use of and access to non-public trading information; and safeguards to protect customer funds from theft, fraud, and other risks.
In its Virtual Markets Integrity Report, the NY OAG concludes that there are vast inconsistencies with regard to how virtual currency trading platforms protect their customers from the risks facing the virtual markets. The Report also raises three broad areas of concern for the virtual currency industry at large:
“By highlighting these weaknesses, as well as other considerations important to consumers, the OAG hopes to educate customers and to encourage the virtual asset marketplace to adopt policies that ensure the integrity of transactions,” the Report states. “As the sector matures, the OAG expects responsible trading platforms – in coordination with consumer advocates, regulators, and law enforcement – to expand the transparency, security, fairness, and accountability of their businesses.”
Not surprisingly, the crypto industry has a lot to say about the Report and its conclusions. Kraken, which elected not to respond to the AG’s questionnaire, was highly critical of the resulting Report. The company wrote on Twitter that it must “object to the highly unprofessional/malicious implication that because we did not respond to the voluntary information request, we ‘might’ be operating illegally.” Kracken added: “We told you we don’t operate in NY. AG trying cases in court of public opinion now?”
Coinbase acknowledged in a blog post that the AG report “shines a helpful spotlight on important compliance issues in digital asset exchange practices.” However, it also raised concerns about inaccuracies about its alleged proprietary trading. According to the company’s blog post, “Coinbase does not trade for the benefit of the company on a proprietary basis… When Coinbase executes [trades], it does so on behalf of Coinbase Consumer customers, not itself.”
If you have any questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work at 201-806-3364.
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