Virtual Markets Integrity Initiative Seeks to Improve Transparency and Accountability of Major Cryptocurrency Trading Platforms to Protect Virtual Currency Investors
AG’s Office Sends Letters to 13 Virtual Currency Trading Platforms or “Exchanges” Requesting Disclosures on Their Operations, Use of Bots, Conflicts of Interest, Outages, and Other Key Issues
New York Attorney General Eric T. Schneiderman launched the Virtual Markets Integrity Initiative, a fact-finding inquiry into the policies and practices of platforms used by consumers to trade virtual or “crypto” currencies like bitcoin and ether. As part of a broader effort to protect cryptocurrency investors and consumers, the Attorney General’s office sent letters to thirteen major virtual currency trading platforms requesting key information on their operations, internal controls, and safeguards to protect customer assets. As the letters explain, the Initiative seeks to increase transparency and accountability as it relates to the platforms retail investors rely on to trade virtual currency, and better inform enforcement agencies, investors, and consumers.
“With cryptocurrency on the rise, consumers in New York and across the country have a right to transparency and accountability when they invest their money. Yet too often, consumers don’t have the basic facts they need to assess the fairness, integrity, and security of these trading platforms,” said Attorney General Schneiderman. “Our Virtual Markets Integrity Initiative sets out to change that, promoting the accountability and transparency in the virtual currency marketplace that investors and consumers deserve.”
Virtual or “crypto” currency trading platforms match buyers and sellers of virtual currencies. Sometimes referred to as “exchanges,” these platforms are a key point of entry into the virtual currency market for professional and retail investors alike. They serve as repositories for sensitive personal information and custodians of vast sums of virtual and government-issued (or “fiat”) currency.
Ensuring that enforcement agencies, investors, and consumers have the information they need to understand the practices and the risks on these platforms is critical, given reports of the theft of vast sums of virtual currency from customer accounts, sudden and poorly explained trading outages, possible market manipulation, and difficulties when withdrawing funds from accounts. Often, the platforms lack the basic market protections of traditional investing platforms. Moreover, the extent of disclosures to customers about trading rules, internal controls, and other basic practices varies from platform-to-platform, making it difficult or impossible for prospective users to evaluate the actual risks of trading on a particular platform.
The Initiative stems from the Attorney General’s duty to protect consumers and ensure the fairness and integrity of the financial markets. Before trading on a new platform, sophisticated investors routinely demand robust disclosures, allowing them to assess the platform’s operations and the adequacy of its policies and internal controls. The questionnaire delivered to the virtual currency platforms asks for similar information so that average investors can better understand the risks and protections.
The questionnaires ask the platforms to disclose information falling within six major topic areas, including (1) Ownership and Control, (2) Basic Operation and Fees, (3) Trading Policies and Procedures, (4) Outages and Other Suspensions of Trading, (5) Internal Controls, and (6) Privacy and Money Laundering. Among other areas of interest, the questionnaires request that platforms describe their approach to combating suspicious trading and market manipulation; their policies on the operation of bots; their limitations on the use of and access to non-public trading information; and the safeguards they have in place to protect customer funds from theft, fraud, and other risks. The Attorney General’s office will analyze the responses, compare them across platforms, and at the conclusion of this process, present what it learned to the public.
The Investor Protection Bureau of the Office of the Attorney General sent letters to the following virtual currency trading platforms: (1) Coinbase, Inc. (GDAX); (2) Gemini Trust Company; (3) bitFlyer USA, Inc.; (4) iFinex Inc. (Bitfinex); (5) Bitstamp USA Inc.; (6) Payward, Inc. (Kraken); (7) Bittrex, Inc.; (8) Circle Internet Financial Limited (Poloniex LLC); (9) Binance Limited; (10) Elite Way Developments LLP (Tidex.com); (11) Gate Technology Incorporated (Gate.io); (12) itBit Trust Company; and (13) Huobi Global Limited (Huobi.Pro).
The full text of the letters sent to the trading platforms can be found below. The questionnaire is available here.
We write on behalf of the New York State Office of the Attorney General (“OAG”) to request the participation of [company] in OAG’s Virtual Markets Integrity Initiative, which seeks to protect the interests of New York residents who trade virtual currency and related investment products. OAG is asking major virtual currency trading platforms (often referred to as “exchanges”) to respond to a questionnaire addressing key aspects of their operations, including their fee structure, their internal controls, and the measures they take to safeguard funds in customer accounts. Through this Initiative, OAG seeks to increase transparency and accountability in the virtual currency marketplace—and better inform the actions of enforcement agencies, investors, and consumers in this space.
As you know, bitcoin, ether, and other virtual currencies have captured the imagination of millions of people worldwide. Representing a technological advance, a medium of exchange, and an investment opportunity all at once, virtual currencies are inspiring innovators, entrepreneurs, and investors—and are fueling an increasingly diverse ecosystem of companies and applications. But virtual currency is also a highly speculative sector, featuring significant volatility, instability, and risk. Moreover, published reports indicate the sector has attracted fraudsters, market manipulators, and thieves. As the State’s chief law enforcement agency, OAG is responsible for protecting consumers and investors from these bad actors and ensuring the fairness and integrity of New York’s financial markets. See, e.g., N.Y. Exec. Law § 63(12); N.Y. Gen. Bus. Law § 349; N.Y. Gen. Bus. Law § 352.
As with other emerging sectors, the challenge with virtual currency is to prevent fraud and other abuses, safeguard market integrity, and protect individual investors—without stifling legitimate market activity or innovation. OAG’s Virtual Markets Integrity Initiative seeks to advance these objectives by promoting meaningful transparency, accountability, and the opportunity for government agencies, consumer advocates, and investors to compare the policies, procedures, and protections of virtual currency platforms. Sophisticated investors routinely require privately-owned trading venues on which they are considering trading to furnish robust disclosures about their operations, policies, and internal controls so that they can evaluate the risks of trading on a given platform. The enclosed questionnaire asks [company] to supply similar information, for the benefit of not only professional investors and financial firms, but all consumers who may trade virtual currency on platforms, so that they better understand their operations and the associated risks.
The topics set forth in our questionnaire address fundamental aspects of your operations or issues that have already attracted significant public attention. Indeed, many may be covered in your web disclosures or regulatory filings. They range from your platform’s basic trading rules, to the policies and safeguards you have implemented to prevent conflicts of interest, fraud, and illegality; address the operation of bots; and protection of customer assets from theft and other risks. We will review and assess your responses, compare them with those of other platforms, and disclose certain information in a publicly accessible format. As part of this disclosure, we will identify any platforms that decline to provide meaningfully complete responses.
We kindly ask that you provide detailed and clear responses for each topic, as well as a contact from whom we can seek supplemental information, as necessary. Please complete the enclosed questionnaire and return your responses to our attention no later than May 1, 2018. In the event you have any questions or concerns, please do not hesitate to reach out to us.
Simon G. Brandler, Senior Advisor & Special Counsel
John D. Castiglione, Asst. Attorney General, Investor Protection Bureau
 As used here and in the enclosed questionnaire, “Virtual Currency” and other terms have the same meanings as set forth in 23 NYCRR § 200.2 (Definitions).
 We are aware that certain trading platforms have formal rules barring access in New York and may not have a license to engage in virtual currency business activity in New York. Among other topics, we are asking platforms to describe their measures for restricting trading from prohibited jurisdictions.
 This role is separate from, but complementary to, that of New York State’s Department of Financial Services, which established a first-in-the-nation licensing protocol that requires virtual currency trading platforms and other firms engaged in virtual currency business activities to receive approval to operate and follow certain regulatory requirements.
 You may designate and request confidential treatment for the portion of any response that contains a valid trade secret or may otherwise be exempt from disclosure under New York’s Freedom of Information Law. N.Y. Pub. Off. Law §§ 87(2)(a)-(d).