The New York Attorney General’s office has words for exchanges such as Kraken this week. But what power does it have, when exchanges give New York a miss?
The recently published report from New York Attorney General Barbara Underwood following an investigation into cryptocurrency platforms made for worrying reading for many. Those on the outside of the crypto industry considering dabbling in it would have seen little to encourage them to jump aboard. Those within the industry have raised eyebrows about its contents too.
Now, though, one of the platforms that has found itself in Underwood’s crosshairs has been asking some pressing questions in return.
That platform is Kraken, and for good reason, it describes itself as “one of the world’s largest and oldest bitcoin exchanges”. It operates primarily from its base in San Francisco, and has offices located globally.
As such, Kraken is described as an American-based cryptocurrency exchange, and already going into September, it was having a testing time. The month started with the news that it was laying off 57 members of staff from its aforementioned San Francisco base, around 10% of the headcount based there. It came in the aftermath of rumours about a security breach, but in an email from CEO Jesse Powell, reported at the time by Bloomberg, he insisted that “the cost-saving measure will have zero impact on the quality of our service … Rumors of a security breach are entirely unfounded. No other teams are affected, and we are still aggressively hiring in all areas”.
In the aftermath of the Bloomberg report, the official Kraken Twitter account praised the report, reiterating that no security breach had taken place.
Thank you @CamiRusso for the accurate reporting. Never fun saying goodbye to team members but business needs change, and we try to give the departed a soft landing. To reiterate: there was no security breach. Impetus simply market conditions. https://t.co/qPQNf3P80T
— Kraken Exchange (@krakenfx) September 6, 2018
Not that Kraken is any kind of cheerleader for the outlet. It had previously criticised a Bloomberg report over the summer, arguing that the article in question – this one – “inexplicably fails to comprehend basic market concepts such as arbitrage, order books and currency pegs”.
Kraken’s blog on the issue added that “more troubling, however, was the applause from other “journalist” lemmings as they followed in walking their reputations off a cliff”.
The Virtual Markets Report
Moving back to now, though, and Kraken is back in the news again. It comes in the aftermath of the report from New York Attorney General Barbara D Underwood, that goes by the title Virtual Markets: Integrity Initiative. Earlier this year, 13 cryptocurrency trading platforms operating in the US were mailed a questionnaire as part of the discovery process for the report. That was back in April of this year, and you can find the text of the request from our story at the time.
Nine of those 13 exchanges engaged with it, and four didn’t. Kraken was one of the four that didn’t, and notably, it found itself specifically called out for criticism in the final document.
The report stated that Kraken “claimed they do not allow trading from New York and declined to participate”. However, the Office of the Attorney General looked into that claim, and whether trades were in fact accepted from people located within New York State. As a consequence, Kraken – along with Binance and Gate.io – has now been referred to the state’s Department of Financial Services. In a public Tweet, Barbara Underwood went as far as to name three platforms for “possibly operating unlawfully in New York”. Here’s that Tweet…
Based on the results of our report, we have also referred three platforms – Binance, https://t.co/UEMbx5VSWm, and Kraken – to the New York State Department of Financial Services for possibly operating unlawfully in New York.
— NY AG Underwood (@NewYorkStateAG) September 18, 2018
The report’s focus is on those operating within New York to some degree, and thus the impact of any action will be geographically limited. It feels as though there’s a limit to its power, on geographical lines.
Furthermore, it’s not hard to see a counter argument of some vested interest from the state itself. Traditional trading in America is notably centred in New York City, and whilst there’s been talk of the New York Stock Exchange’s parent company investigating the possibility of a crypto trading platform, there’s a traditional status quo to maintain. If any state in America was going to be particularly damning of cryptocurrency platforms, you’d have put a bit of a Bitcoin on New York being it. It’s got a fair amount to potentially lose from cryptocurrency booming.
Kraken has certainly been making its own views felt on the New York Attorney General’s statements. In particular, it questioned the timing of the report announcement…
Is it a coincidence that this was published the day before the expiration of the @CBOE futures contract? Who traded on insider information and what is being done to prevent manipulation by @NewYorkStateAG employees? Quis custodiet ipsos custodes? https://t.co/XwrW46ywdf
— Kraken Exchange (@krakenfx) September 19, 2018
Note in particular the continued insistence that Kraken doesn’t operate in New York, and the question over, effectively, trial by press announcement. It makes the fair point that engagement with the report was voluntary. It opted not to engage, and yet as part of the report, it’s one of a handful of exchanges specifically singled out. Whether intentional or not, the New York Attorney General has named and shamed, without legally proving there’s something to be shamed for.
Yet that doesn’t mean there’s no problem of course, and by declining to engage with the Office of the District Attorney when the majority did, it can’t help but lead to questions. Certainly, there’s little love lost for Kraken in the report, which has a special blue box added, highlighting quotes from the exchange. “In announcing the company’s decision not to participate in the Initiative”, it reads, “Kraken declared that market manipulation ‘doesn’t matter to most crypto traders,’ even while admitting that ‘scams are rampant’ in the industry”.
Kraken, though, can hardly be accused of being new to the market, and in it for a quick buck. It was established back in 2011, and whereas many have come and gone in that time, it’s been one of the more consistent names in the crypto sector. Might it just be that New York’s relevance to the financial markets, its power base, is threatened? That there’s a turning point ahead in the markets, and New York isn’t looking best placed to capitalise? Kraken CEO, Jesse Powell, has little heed for it, and took to Twitter to voice his pointed thoughts on the matter…
NY is that abusive, controlling ex you broke up with 3 years ago but they keep stalking you, throwing shade on your new relationships, unable to accept that you have happily moved on and are better off without them. #getoverit https://t.co/DC5S1WyRnp
— Jesse Powell (@jespow) September 19, 2018
It feels as though the New York report hasn’t moved anything forward, and thus far has more of a feel of war of words than anything tangibly helpful. Whether the New York Attorney General’s office gets further in its investigation, and has the teeth it seems to think it has remains to be seen. Likewise, how this actually affects the exchanges that are looking to give New York a wide berth remains to be seen.
It feels, if anything, like a lot of noise with no notable outcome thus far, save for a bit of a ripple in the price of crypto. But this year, a ripple in the price of crypto feels like just another weekday…