The Virtual Markets Integrity Report by The New York Attorney General

The Office of the Attorney General of the State of New York (the “OAG”) launched the Virtual Market Integrity Initiative to protect and inform New York residents who trade in virtual or “crypto” currency . After an investigation he published a report based on technical analyzes and questionnaires carried out on thirteen Exchanges, of which nine agreed to participate and another four alleged not to accept transfers from New York. Your introduction Resa:

As a medium of exchange, an investment product, a technology and an emerging economic sector, the virtual currency is complex and evolves rapidly. The OAG Initiative, however, comes from a fundamental principle: consumers and investors deserve to understand how their financial service providers operate, protect customer funds and ensure the integrity of transactions.

The reason to question the exchanges is that according to this department:

Exchanges vary in how they have responded to these risks. Some have taken significant and concrete steps to improve the safety, reliability and transparency of their operations. Others no. Meanwhile, customers have had limited access to the information necessary to assess the security and fundamental equity of the platforms, or to compare among them.

This interest wakes up after the mobilization of values ​​towards the virtual currencies, being Bitcoin that with more renown. However, these currencies have a high volatility, in addition to 1800 coins and every day born more. The text says that “it is no longer an area reserved for amateurs and technology experts, the virtual currency now attracts Wall Street firms and retail investors of” mom and pop “(domestic investors).

To access the virtual currency market, investors rely on virtual asset trading platforms, often called “Exchanges.” These online platforms coincide with buyers and sellers of virtual currency, which perform functions similar to traditional stock exchanges, private trading venues and brokers. But unlike traditional markets, the virtual asset trading platforms that are now in operation have not been registered under state or federal securities or commodity laws. Nor have they implemented common security standards, internal controls, market surveillance protocols, disclosures or other protections for the investor and the consumer.

As a result, customers of virtual asset trading platforms face significant risks. In recent years, hackers have infiltrated the trading platforms and stolen billions of dollars in virtual currency, leaving customers with little or no recourse. Delays and interruptions in Exchanges are common, leaving customers unable to withdraw funds and susceptible to significant losses due to price volatility. Public reports have also linked certain trading platforms with deceptive and predatory practices, market manipulation and privileged information abuse.

The Integrity of the Virtual Markets Initiative.

The OAG applies laws that protect investors and consumers from unfair and deceptive practices and that protect the equity and integrity of financial markets. To that end, in April 2018, the Attorney General’s Office launched the Virtual Market Integrity Initiative (the “initiative”), an investigation into the policies and practices of virtual asset trading platforms. The OAG sent letters and questionnaires to thirteen major commercial platforms. An example of a letter follows this Report as Appendix A. The questionnaire (Appendix B) sought details on the commercial operations of the platforms, as well as information on how the platforms protect clients’ assets. The OAG questions also reflected areas of special concern for everyday retail customers, such as site interruptions, fees and the effects of automated trading or “bot”.

The GAO sought voluntary participation, hoping that the platforms would embrace the opportunity to provide the public with much-needed clarity about basic practices and functionalities. Most did it. Nine of the thirteen platforms participated in the Initiative: 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). The OAG separately invited HBUS, a platform that calls itself the “strategic partner” of the US. UU From Huobi Inc., for you to respond, since the platform was opened for trade in July 2018. HBUS did and your answers are included in this Report. The information provided by these platforms forms the basis of this Report.

Four platforms – Binance Limited, (operated by Gate Technology Incorporated), Huobi Global Limited and Kraken (operated by Payward, Inc.) – said they do not allow trade from New York and refused to participate. The OAG investigated whether these platforms accepted exchanges within the state of New York. Based on this investigation, the OAG sent Binance, and Kraken to the Department of Financial Services for possible violation of New York’s virtual currency regulations.

With respect to the platforms that did not participate, the OAG warns that:

“Customers should also be aware that platforms that refused to participate in the OAG Initiative may not have adequate policies and procedures that govern business suspensions, interruptions or scheduled maintenance, and that customers’ virtual or fixed currencies are not available for transfer or withdrawal. without prior notice”.

The Virtual Market Integrity Report

In conclusion, the OAG has brought to light “The Virtual Market Integrity Report” that addresses areas of special interest for the transparency, equity and security of virtual asset trading platforms, and highlights the key policies and practices of the platforms. who responded The report includes the following sections:

Section I: Jurisdiction, acceptance of currencies and fees. This section analyzes how customers register on trading platforms, access controls established on the platforms, their acceptance of the fiduciary currency (that is, the traditional currency issued by the government) and their tariff structures.

Section II: Commercial policies and market equity. This section addresses the current negotiation rules in trading platforms and fairness for retail investors and includes the discussion of the types of orders, the availability of credit (negotiation of margins), the automated or algorithmic trading policies and the measures adopted (if applicable) to address market manipulation and other abusive business practices.

Section III: Handling Conflicts of Interest. This section addresses potential conflicts that may arise between the interests of virtual asset trading platforms, their employees and their customers.

Section IV: Security, insurance and protection of consumer funds. This section covers the use of independent audits by trading platforms, their independent security tests and their safeguarding of client funds through insurance and other means.

Section V: Access to funds, suspensions and interruptions of the client. This section discusses specific issues related to customer transactions and withdrawals, policies to suspend commercial activity, including notification to the customer in case of interruptions or scheduled maintenance.

On September 18 one of the OAG members posted on twitter

The purpose of this report is to provide information on virtual asset trading platforms to customers who have used, or are considering using, those platforms to conduct transactions in virtual currency.

This Report reflects the information provided voluntarily by the platforms. Although the platforms were asked to confirm the information they provided, the OAG can not guarantee the accuracy of their responses. In addition, although the OAG endeavored to include trading platforms widely used in New York, the United States and abroad, to provide a snapshot of the industry, its policies and procedures are not necessarily representative of all trading platforms. Seven of the ten participating platforms: bitFlyer USA, Bitstamp, Bittrex, CoinBase, Gemini, itBit and the approval of Poloniex (Circle); seek the approval of the New York State Department of Financial Services (“DFS”) to operate virtual currency in New York. These companies must keep in mind that in accordance with DFS requirements, companies with a virtual currency license must maintain policies and practices designed, among other things, to protect deposited funds, prevent money laundering and illegal activity, and respond to other risks. Given these requirements, and the constant monitoring and monitoring by the DFS, it is likely that the client’s protections on the platforms subject to the BitLicense regime are better than those prevailing in other platforms.

Key findings about the state of virtual markets

The Initiative revealed that virtual asset trading platforms vary significantly in their comprehensiveness to respond to the risks faced by virtual markets and fulfill their responsibilities to customers. The Initiative also revealed three broad areas of concern for virtual markets:

The different lines of business and the operational functions of trading platforms create potential conflicts of interest. Virtual asset trading platforms often participate in several lines of business that would be carefully restricted or monitored in a traditional business environment. Platforms often serve as places of exchange, operating the platform in which buyers and sellers trade virtual and fiduciary currencies; in a role similar to a traditional stockbroker, representing traders and executing trades on their behalf; as transmitters of money, transferring virtual and fiduciary currency and converting it from one form to another; as proprietary merchants, buying and selling virtual currencies for their own accounts, often on their own platforms; as owners of large virtual currency holdings; and, in some cases, as issuers of a virtual currency listed on its own platforms and others, with a direct interest in its performance. In addition, employees of the platform, who can access information on customer orders, new currency lists and other non-public information, often have virtual currency and operate on their own or competing platforms. Each role has a markedly different set of incentives, which introduces a substantial potential for conflicts between platform interests, platform experts and platform clients.

Trading platforms have yet to implement serious efforts to prevent abusive trading activity. Although some virtual currency platforms have taken steps to monitor the impartiality of their platforms and safeguard the integrity of their exchange, others do not. Platforms lack solid historical and real-time market surveillance capabilities, such as those found in traditional trading venues, to identify and stop suspicious business patterns. There is no mechanism to analyze suspicious commercial strategies on multiple platforms. Few platforms severely restrict or even monitor the operation of bots or automated algorithmic transactions in their facilities. In fact, certain trading platforms deny any responsibility for preventing merchants from artificially affecting prices. These factors, together with the concentration of the virtual currency in the hands of a relatively small number of the main merchants, leave the platforms very susceptible to abuse. Only a small number of platforms have taken significant steps to reduce those risks.

The protections for clients’ funds are often limited or illusory. The generally accepted methods for auditing virtual assets do not exist, and the trading platforms lack a consistent and transparent approach to independently audit the virtual currency supposedly in their possession; Several do not claim to do any independent audit of their virtual currency holdings at all. This makes it difficult or impossible to confirm whether the platforms are responsible for the virtual assets of their customers as claimed. Customers are highly exposed in case of piracy or unauthorized withdrawal. While domestic or foreign deposit insurance can compensate customers for certain losses of stolen or stolen currency, there is no similar compensation available for virtual currency losses. There are serious doubts about the scope and sufficiency of the commercial insurance that certain platforms intend to carry to cover the losses of virtual assets. Other platforms do not insure against losses of virtual assets at all.
By highlighting these weaknesses, as well as other important considerations for consumers, the OAG hopes to educate customers and encourage the virtual asset market to adopt policies that guarantee the integrity of transactions. As the sector matures, the OAG expects responsible negotiation platforms, in coordination with consumer advocates, regulators and law enforcement, to expand transparency, security, equity and the responsibility of their businesses.

Daniela Caro

Daniela Caro

Writer by birth, curious by profession ... I learn a little more every day from the cryptocurrency.