The Attorney General (OAG) of the state of New York has released a 42-page report announcing the launch of an initiative to protect and inform residents who invest in cryptocurrency in light of increasing interest in the growing market.

“Consumers and investors deserve to understand how their financial service providers operate, protect customer funds, and ensure the integrity of transactions,” says the OAG in the document authored by the state’s Attorney General Barbara D. Underwood.

Crypto is evolving quickly

The report – the Virtual Markets Integrity Initiative – refers to cryptocurrency as “medium of exchange, an investment product, a technology, and an emerging economic sector”, which is complex and evolving rapidly.

Interest in virtual currency has also grown significantly, the OAG adds. “The best-known virtual currency, Bitcoin, was created less than a decade ago and is now valued at over $100 billion. Another virtual currency, Ethereum, went from an abstract concept described in a ‘whitepaper’ to a tradeable asset valued at over $20 billion in less than five years. Currently, there are more than 1,800 different virtual currencies exchanged around the world, with more released each month.”

Crypto applies to everyone

Underwood notes that cryptocurrency is “no longer the exclusive province of tech-savvy hobbyist and traders”. She adds that virtual currency now applies to everyone from investors and bankers in Wall Street to “mom-and-pop” retail investors.

The report explains that unlike traditional stocks and commodities, virtual currency is not tied to any asset or the performance of any company. “The primary driver of a virtual currency’s value appears instead to be the willingness of people to use or trade it.”

Risks in trading platforms

In spite of some positive remarks towards cryptocurrency, Underwood underscores the risks she believes investors face when trading this asset. However, she made it clear that cryptocurrencies themselves do not represent security issues for investors, but exchanges do.

“Virtual asset trading platforms now in operation have not registered under state or federal securities or commodities laws,” she states in the document. “Nor have they implemented common standards for security, internal controls, market surveillance protocols, disclosures, or other investor and consumer protections. Accordingly, customers of virtual asset trading platforms face significant risks.”

The report says hackers have breached the security of trading platforms and stolen billions of dollars worth of virtual currency and says that many of those platforms offer little or no recourse.

The initiative also warns of delays and outages on the trading platforms which leave customers with no access to their funds and, therefore, vulnerable to significant losses due to the volatility of the market. And then there are the trading platforms that are linked to “deceptive and predatory practices, market manipulation, and insider abuses”.

Trading platforms participation

Underwood says her office invited various trading platforms to provide the OAG with information on how they operate voluntarily.

Coinbase, Bitstamp, bitFlyer, Bitfinex, Bittrex, Gemini, itBit, Poloniex, and HBUS participated in the initiative. However, Binance, Gate, Houbi and Kraken declined the invitation, claiming they did not allow New Yorkers to trade on their platforms.

“The OAG investigated whether those platforms accepted trades from within New York State. Based on this investigation, the OAG referred Binance, Gate.io, and Kraken to the Department of Financial Services for potential violation of New York’s virtual currency regulations,” she says.

Key Findings

The OAG found that trading platforms incur in various lines of business and operational roles that create a potential conflict of interest. For example, they serve as currency exchanges, traditional brokers and dealers, money transmitters, proprietary traders, and owners of large cryptocurrency holdings.

It says platforms lack robust real-time and historical surveillance capabilities to stop suspicious trading patterns. Few of them restrict or monitor the operation of bots and even deny responsibility for stopping traders from manipulating prices, which opens them to abuse by speculators. It also highlights the risks generated by the fact that only a small number of traders control the majority of the crypto market.

The OAG says it “hopes to educate customers and to encourage the virtual asset marketplace to adopt policies that ensure the integrity of transactions, by highlighting these weaknesses, as well as other considerations important to consumers”.

The Attorney General also “expects responsible trading platforms – in coordination with consumer advocates, regulators, and law enforcement – to expand the transparency, security, fairness, and accountability of their businesses”.

The prosecutor’s office calls on investors to research the trading platforms they decide to use and consider their jurisdiction and if and how they can seek compensation in the event their data or funds are stolen, and platforms become insolvent.

Recommended questions

Underwood recommends the following questions to a platform before using them:

1. What security measures are in place to stop hackers from unlawfully accessing the platform or particular customer accounts?

2. What insurance or other policies are in place to make customers whole in
the event of a theft of virtual or fiat currency?

3. What guardrails or other policies does the platform maintain to ensure fairness for retail investors in trading against professionals?

4. What controls does the platform maintain to keep unauthorised or abusive traders off the venue?

5. What policies are in place to prevent the company and its employees from exploiting non-public information to benefit themselves at the expense of customers?

6. How does the platform notify customers of a site outage or suspension, the terms under which trading will resume, and how customers can access funds during an outage?

7. What steps does the platform take to promote transparency and to subject its security, its virtual and fiat accounts, and its controls to independent auditing or verification?

8. Is the platform subject to, and registered under, banking regulations or a similar regime – for instance, the New York BitLicense regulations?