New York Attorney General writes to exchanges demanding operational details

New York’s Attorney General, Eric Schneiderman, is seeking information from 13 cryptocurrency trading platforms regarding their operations within his jurisdiction. Here’s the list, and what he wants to know.

This information request includes “disclosures on their operations, use of Bots, conflicts of interest, outages,” and “other key issues” – which includes fee structures, internal controls, and safeguards to protect customer assets.

“With cryptocurrency on the rise, consumers in New York and across the country have a right to transparency and accountability when they invest their money,” the AG’s press statement says. It’s all part of the city’s ‘Virtual Markets Integrity Initiative’, which is looking to help protect cryptocurrency investors by providing them information they need to understand the practices and risks of trading on these platforms.

The list of exchanges contacted is as follows: Coinbase, Inc. (GDAX); Gemini Trust Company; bitFlyer USA, Inc.; iFinex Inc. (Bitfinex); Bitstamp USA Inc.; Payward, Inc. (Kraken); Bittrex, Inc.; Circle Internet Financial Limited (Poloniex LLC); Binance Limited; Elite Way Developments LLP (Tidex.com); Gate Technology Incorporated (Gate.io); itBit Trust Company; and Huobi Global Limited (Huobi.Pro). They have, the AG’s statement says, until May 1st to respond.

The text of the letter reads:

We write on behalf of the New York State Office of the Attorney General (“OAG”) to request the participation of [company] in OAG’s Virtual Markets Integrity Initiative, which seeks to protect the interests of New York residents who trade virtual currency and related investment products. OAG is asking major virtual currency trading platforms (often referred to as “exchanges”) to respond to a questionnaire addressing key aspects of their operations, including their fee structure, their internal controls, and the measures they take to safeguard funds in customer accounts. Through this Initiative, OAG seeks to increase transparency and accountability in the virtual currency marketplace—and better inform the actions of enforcement agencies, investors, and consumers in this space.

As you know, bitcoin, ether, and other virtual currencies have captured the imagination of millions of people worldwide. Representing a technological advance, a medium of exchange, and an investment opportunity all at once, virtual currencies are inspiring innovators, entrepreneurs, and investors—and are fueling an increasingly diverse ecosystem of companies and applications. But virtual currency is also a highly speculative sector, featuring significant volatility, instability, and risk. Moreover, published reports indicate the sector has attracted fraudsters, market manipulators, and thieves. As the State’s chief law enforcement agency, OAG is responsible for protecting consumers and investors from these bad actors and ensuring the fairness and integrity of New York’s financial markets. See, e.g., N.Y. Exec. Law § 63(12); N.Y. Gen. Bus. Law § 349; N.Y. Gen. Bus. Law § 352.

As with other emerging sectors, the challenge with virtual currency is to prevent fraud and other abuses, safeguard market integrity, and protect individual investors—without stifling legitimate market activity or innovation. OAG’s Virtual Markets Integrity Initiative seeks to advance these objectives by promoting meaningful transparency, accountability, and the opportunity for government agencies, consumer advocates, and investors to compare the policies, procedures, and protections of virtual currency platforms. Sophisticated investors routinely require privately-owned trading venues on which they are considering trading to furnish robust disclosures about their operations, policies, and internal controls so that they can evaluate the risks of trading on a given platform. The enclosed questionnaire asks [company] to supply similar information, for the benefit of not only professional investors and financial firms, but all consumers who may trade virtual currency on platforms, so that they better understand their operations and the associated risks.

The topics set forth in our questionnaire address fundamental aspects of your operations or issues that have already attracted significant public attention.  Indeed, many may be covered in your web disclosures or regulatory filings. They range from your platform’s basic trading rules, to the policies and safeguards you have implemented to prevent conflicts of interest, fraud, and illegality; address the operation of bots; and protection of customer assets from theft and other risks. We will review and assess your responses, compare them with those of other platforms, and disclose certain information in a publicly accessible format. As part of this disclosure, we will identify any platforms that decline to provide meaningfully complete responses.

We kindly ask that you provide detailed and clear responses for each topic, as well as a contact from whom we can seek supplemental information, as necessary. Please complete the enclosed questionnaire and return your responses to our attention no later than May 1, 2018. In the event you have any questions or concerns, please do not hesitate to reach out to us.

Sincerely,                                           

Simon G. Brandler, Senior Advisor & Special Counsel                               

John D. Castiglione, Asst. Attorney General, Investor Protection Bureau

You can read the questionnaire here.

This is the latest of a series of moves, at both Federal and state levels to bring the cryptocurrency market under tighter control in the US. Efforts have largely focused, thus far, on policing of ICOs – but it stands to reason that a financial centre like New York would turn its attention to exchanges in this way.

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