NYAG Report on Virtual Markets

By Robert M. Crea

On September 18, 2018, the NY Attorney General’s office (“OAG”) published its Virtual Markets Integrity Initiative report (the “Report”) (found here).  The Report includes findings from the OAG’s April 2018 fact-finding inquiry (the “Initiative”) into the policies and practices of various virtual asset trading platforms.  The Report is anything but positive.

The Report expresses a number of concerns with the following key findings:

  • many exchanges conduct business lines and operational roles creating potential conflicts of interest;
  • trading platforms have yet to implement serious efforts to impede abusive trading activity; and
  • protections for customer funds are often limited or illusory.

The Report identifies by name certain platforms that declined to participate in the April 2018 survey on the claim that they do not allow trading from New York.  The Report acknowledges that the OAG has referred three of these platforms (Binance, Gate.io and Kraken) to the Department of Financial Services for potential violation of NY’s virtual currency regulations.

The Report also takes particular issue with Kraken, and describes Kraken’s public response declining the OAG’s request for information as “alarming.”   Kraken, in announcing its decision not to participate in the fact-finding initiative apparently declared that market manipulation “doesn’t matter to most crypto traders. . . .”

The report also echoes a number of the concerns that the SEC previously expressed about crypto exchanges in March 2018 (found here).  Dalia Blass, the SEC’s Director, Division of Investment Management, also expressed similar concerns about the risks of market manipulation in her letter to SIFMA on the possibility of retail cryptocurrency-related products (found here). As an aside, it would seem unlikely that the SEC might approve a retail product in this space until there is clear regulatory framework for virtual currency exchanges.  It remains to be seen who will be first to create a comprehensive regulatory regime for virtual currency exchanges, either the states or a federal agency.

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