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As already discussed in several other postings there definitely are serious compliance issues with crypto exchanges or so-called virtual assets trading platforms how the New York State Office of the Attorney General (“OAG”) prefers to call them. Now the OAG issued a report on its findings.

The Questionnaire

In April 2018 the New York State Office of the Attorney General (the “OAG”) launched the Virtual Markets Integrity Initiative with the target to protect and inform New York residents who trade in virtual or “crypto” currency. As a starting point, the OAG sent letters and questionnaires to thirteen major trading platforms. Purportedly, the participation in the OAG questionnaire´s was voluntary. It asked for details on the platforms’ trading operations, as well as for information about how the platforms protect customer assets. Areas of special concern also included operational questions site outages, fees, and the effects of automated or “bot” trading.

Nine of the thirteen platforms participated in the Initiative and responded in a first effort to get it right: Bitfinex (operated by iFinex Inc.), bitFlyer USA, Inc., Bitstamp, Ltd., Bittrex, Inc., Coinbase, Inc., Gemini Trust Company, itBit (operated by Paxos Trust Company), Poloniex (owned by Circle Internet Financial Limited), and Tidex (operated by Elite Way Developments LLP). Four platforms – Binance Limited, Gate.io (operated by Gate Technology Incorporated), Huobi Global Limited, and Kraken (operated by Payward, Inc.) – claimed they do not allow trading from New York and declined to participate.

The results of the study show that the trading platforms vary significantly in their operations, their internal controls, and safeguards to protect consumer assets. Most of the trading platforms evidently lack the necessary policies and procedures to ensure the fairness, integrity, and security of their exchanges.

The Results

The biggest area of concerns can be summarized as follows:

(1) Conflicts of interests

The study reveals that there are pervasive conflicts in interest as virtual asset trading platforms evidently often engage in several lines of business that would be restricted or carefully monitored in a traditional trading environment. Platforms often serve (i) as venues of exchange, operating the platform on which buyers and sellers trade virtual and fiat currencies; (ii) in a role akin to a traditional broker-dealer, representing traders and executing trades on their behalf; (iii) as money-transmitters, transferring virtual and fiat currency and converting it from one form to another; (iv) as proprietary traders, buying and selling virtual currency for their own accounts, often on their own platforms; (v) as owners of large virtual currency holdings; and, in some cases, (vi) as issuers of a virtual currency listed on their own and other platforms, with a direct stake in its performance.

(2) Abusive trading activity

The study reveals that many trading platforms seem to cater to professional, automated traders—leaving retail customers at a disadvantage. First, many platforms have yet to implement serious efforts to monitor and stop abusive trading. Few platforms seriously restrict or even monitor, the operation of bots or automated algorithmic trading on their venue. 

 (3) Protection for customer funds

Third, customers have limited protection for their funds. Generally accepted methods for auditing virtual assets do not exist, and trading platforms lack a consistent and transparent approach to independently auditing the virtual currency that is purportedly in their possession. If a hack or unauthorized withdrawal occurs, customers are also highly exposed. Unlike FDIC insurance, there’s no public protection to cover virtual currency losses. There are serious Qs about the scope and sufficiency of the insurance some platforms carry to cover those losses. Some platforms do not insure against losses at all.

(4) Insider trading

Insider trading is intensively discussed and regulated in the Securities Act of 1933 as well as under European and national regulations for traditional stock exchanges, private trading venue and broker-dealers as insider trading can badly harm people.

The amazing point about the results of the OAG`s initiative is that all these issues were also experienced with traditional trading places during the past 100 years – may be based on technological achievements this time all these bad behaviors are much trickier and more difficult to catch.   The result of the bad behavior on the traditional marketplaces are well known to all of us: crash in 1929, the financial crisis in 2008 and so on. So the crypto space has to have its own learning curve again to get rid of the teething issues, so we learn that evidently greed and fraud always is preeminent and regulation and disciplinary measures are required.

It wasn’t so voluntary

By the way, it can be burdensome not to participate in such “voluntary” initiatives: Four platforms – Binance Limited, Gate.io (operated by Gate Technology Incorporated), Huobi Global Limited, and Kraken (operated by Payward, Inc.) – claimed they do not allow trading from New York and declined to participate. 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.


A save market environment is the prerequisite for a sustainable development of a crypto-economy. Hence, we consider this OAG initiative a great first step and again wonder when  EU authorities jump on the train.

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