NY AG Launches Probe Of 13 Major Crypto Exchanges (Incl. Coinbase, Gemini)

Crytpocurrencies have been on the rise for last few days (perhaps, as tax-based selling pressure abates) but we suspect downside risk may increase again as WSJ reports NY AG Schneiderman contacts 13 crypto-exchanges, claiming that investors dealing in the fast-growing markets often don’t have the basic facts needed to protect themselves.

The Investor Protection Bureau of the Office of the Attorney General sent letters to the following virtual currency trading platforms:

(1) Coinbase, Inc. (GDAX);

(2) Gemini Trust Company;

(3) bitFlyer USA, Inc.;

(4) iFinex Inc. (Bitfinex);

(5) Bitstamp USA Inc.;

(6) Payward, Inc. (Kraken);

(7) Bittrex, Inc.;

(8) Circle Internet Financial Limited (Poloniex LLC);

(9) Binance Limited;

(10) Elite Way Developments LLP (Tidex.com);

(11) Gate Technology Incorporated (Gate.io);

(12) itBit Trust Company; and

(13) Huobi Global Limited (Huobi.Pro).

The full text of the letters sent to the trading platforms can be found below. The questionnaire is available here.

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.[1] 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.[2] 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.[3]  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.[4] 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.

Notably - for now - the markets are not affected...

 

The Wall Street Journal notes that the requests are part of New York Attorney General Eric Schneiderman’s initiative to bring transparency to an industry that prizes anonymity and lighter regulation than established securities and derivatives markets.

Mr. Schneiderman’s office said the program, called Virtual Markets Integrity Initiative,  is part of its responsibility to protect consumers and ensure the integrity of financial markets, and its goal is to ensure that investors can have a better understanding of the risks and protections afforded them on these sites.

It asked for the exchanges to respond to its questionnaire in full by May 1. The AG’s office plans to publish the information “in a publicly accessible format.”

The AG’s office isn’t the first New York regulator to address the issue of transparency in cryptocurrencies, which may explain the lack of reaction in crypto markets. The state’s Department of Financial Services began looking into regulation of cryptocurrency exchanges in 2014, an effort that culminated in a bitcoin-licence program organized by the state.