NY Attorney General Warns Three Crypto Exchanges May Be Breaking the Law

Marco Green
September 20, 2018

A number of cryptocurrency exchanges lack basic consumer protections and are vulnerable to exploitation by market manipulators, the NY attorney general's office said in a report Tuesday. 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.

The state launched its Virtual Markets Integrity Initiative in April this year, asking 13 platforms to voluntarily share information about their practices, including internal controls and safeguards against market manipulation and fraud. Interestingly enough, the aforementioned exchanges had refused to provide information to regulators on a previous date, which might have led to the filing of this potentially incriminating report.

In a statement that came alongside the report, Underwood drew attention to why this move was necessary, noting that citizens of New York state "deserve basic transparency and accountability" while investing, whether it be via a cryptocurrency platform or something as established as the New York Stock Exchange or Nasdaq markets.

Kraken, the only one of the four based in the USA, was the most vociferous in its refusal to respond to the inquiry, calling the initial request "ill-prepared" and "an overly broad fishing expedition that asks questions irrelevant to the stated objective and misses obvious questions that actually would be helpful".

The cryptocurrency bitcoin has a problem as old as money itself-theft.

The attorney general concludes the report with a list of eight questions that exchanges should be able to confidently answer.

First, exchanges dabble in several lines of business that would normally be carefully monitored in a traditional trading environment.

"Each role has a markedly different set of incentives, introducing substantial potential for conflicts between the interests of the platform, platform insiders and platform customers", the report states.

"Most platforms seem to cater to professional, automated traders, with many venues offering special pricing and other features to such traders, leaving retail customers at a disadvantage", the report said. "A platform can not take action to protect customers from market manipulation and other abuses if it is not aware of those practices in the first place".

Lastly, protections for consumer funds, the report said, "are often limited or illusory". Some exchanges also allow their own employees to hold and trade on their own or competing platforms. "That makes it hard or impossible to confirm whether platforms are responsibly holding their customers' virtual assets as claimed".

The study also found that "trading platforms lack a consistent and transparent approach to independently auditing the virtual currency purportedly in their possession", making it "difficult or impossible" to confirm that the exchanges are responsibly holding customer accounts.

"Customers would do well to avoid platforms that can not satisfactorily answer the question posed in this report", it said.

Other reports by Click Lancashire

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