The office of New York Attorney General (NYAG) has published a 32-page report, titled Virtual Markets Integrity Initiative yesterday, September 18th. The months-long investigation suggests that crypto exchanges are vulnerable to market manipulation and are not doing enough to protect their clients. Additionally, several exchanges were forwarded to the Department of Financial Services to investigate potential violations of New York’s digital currency regulations.
The initiative revealed three broad areas of concern, the first one being potential conflicts of interest. NYAG states that crypto exchanges often engage in “several lines of business that would be restricted or carefully monitored in a traditional trading environment.” These include serving as venues of exchange, broker-dealers, money transmitters, proprietary traders, owners of large virtual currency holdings and issuers of digital currencies in some cases. Additionally, platform employees, who have access to insider information often trade on their own or competing platforms. This results in “substantial potential for conflicts between the interests of the platform, platform insiders, and platform customers.”
The second concern for the NYAG is failure to restrict abusive trading activity. According to the report, “Platforms lack robust real-time and historical market surveillance capabilities, like those found in traditional trading venues, to identify and stop suspicious trading patterns. There is no mechanism for analyzing suspicious trading strategies across multiple platforms. […] Those factors, coupled with the concentration of virtual currency in the hands of a relatively small number of major traders, leave the platforms highly susceptible to abuse. Only a small number of platforms have taken meaningful steps to lessen those risks.”
The final major concern is the deficient protection of customer funds. Report states that traditional auditing methods do not exist in the crypto sphere and several platforms do not do any independent auditing at all. Therefore, “Customers are highly exposed in the event of a hack or unauthorized withdrawal. While domestic or foreign deposit insurance may compensate customers for certain losses of stolen or misappropriated fiat currency, no similar compensation is available for virtual currency losses.”
The initiative was launched back in April by a former Attorney General Eric Schneiderman, who asked a number of crypto exchanges to provide information on customer protection and transparency. Bitfinex, bitFlyer, Bitstamp, Bittrex, Coinbase, Gemini, itBit, Poloniex and Tidex exchanges have all agreed to participate on a voluntary basis. However, Binance, Gate.io, Huobi and Kraken have declined and even went on the offensive with the Kraken CEO Jesse Powell labeling NYAG’s inquiry insulting.
Somebody has to say what everybody's actually thinking about the NYAG's inquiry. The placative kowtowing toward this kind of abuse sends the message that it's ok. It's not ok. It's insulting. https://t.co/sta9VuXPK1 pic.twitter.com/4Jg66bia1I
— Jesse Powell (@jespow) April 18, 2018
The report fires back at Kraken, claiming that, “The Kraken platform’s public response is alarming. In announcing the company’s decision not to participate in the Initiative, Kraken declared that market manipulation ‘doesn’t matter to most crypto traders,’ even while admitting that ‘scams are rampant” in the industry.'”
The NYAG office claims that the purpose of the study is to educate customers and encourage crypto exchanges to takes steps in ensuring the integrity of their transactions. As the crypto industry matures, the Attorney General is hopeful that crypto trading platforms will cooperate with regulators to increase the security and transparency of their businesses.
Image Source: “Flickr”
I have been following the crypto markets since mid 2017, just in time to witness the incredible surge of the digital asset industry. Fascinated by the potential of blockchain technology I’ve started to dig deeper and that’s how I ended up meeting the Toshi Times team. I hold a Political Science degree, therefore the crypto regulation development is particularly interesting for me. I’m also heavily involved with music, running my own label, a YouTube channel and working with distribution. People call blockchain the ‘Fourth Industrial Revolution’ and I believe it will change our daily lives in the coming years and we will have the front row seats to witness it.