Canada: New York Attorney General Releases Report On Market Practices Of Virtual Asset Trading Platforms

Last Updated: October 9 2018
Article by SnIP/ITs, Ana Badour and Jonathan Rand

Most Read Contributor in Canada, September 2018

As part of its Virtual Markets Integrity Initiative (the "Initiative"), the New York State Office of the Attorney General (the "NY AG") recently released the Virtual Markets Integrity Report (the "Report"). The Report aggregates the voluntary responses of nine major cryptocurrency trading platforms to a questionnaire the NY AG prepared in an attempt to better understand how to protect investors and safeguard the fairness and integrity of the virtual marketplace. Some cryptocurrency platforms contacted by the NY AG chose not to participate in the Initiative.

Here are some key takeaways of the Report:

  1. Virtual asset trading platforms differ in how they verify and monitor authorized access. Most virtual asset trading platforms claim to only allow customers from authorized jurisdictions to access their venues and exclude customers who violate their policies, including those related to market manipulation and money laundering. Although the Report notes that most participating platforms monitor access by IP address, only two of the nine respondents purported to limit VPN access, raising potential questions about the ability of the other trading platforms to restrict access to authorized users. 
  2. Fee structure and the degree of fee disclosure vary between platforms. While some platforms charge the same fee for "makers" and "takers" of liquidity, several others revealed that they charge higher fees for takers than makers. Most reporting platforms also charge fees for deposits and withdrawals of funds, which increases the cost of shifting capital to and from individual platforms and creates a disincentive for customers to switch. Interestingly, almost all respondents offer discounts to high-volume customers, and five platforms indicated that certain traders may receive preferential pricing according to the terms of bilateral agreements that are hidden from public fee schedules. The NY AG cautioned that customers should carefully review and understand the complete fee schedule provided by a platform prior to trading. However, they should also acknowledge that it may not present the entirety of the transaction costs for which they will be responsible. 
  3. Most platforms integrate special features that may preference professional traders. Apart from typical "buy" and "sell" orders, many of the participating platforms offer a variety of different order types such as "fill-or-kill" or "immediate-or-cancel." These special order types disproportionately advantage professional traders using algorithmic strategies, which automatically submit or cancel orders in response to market signals not visible and possibly unavailable to regular traders. Another feature that tends to favour sophisticated traders is the ability to "co-locate" their terminals directly with the platform's computers in a data center. Colocation provides a faster view of the platform order book than is available to retail customers. Moreover, though every participating platform allows automated trading, only a few have formal policies in place to oversee and prevent potentially abusive automated strategies. In turn, the NY AG also cautioned that users should be aware that virtual asset trading platforms have attributes that can distort the overall trading environment to the detriment of retail customers. 
  4. Managing potential conflicts of interest remains a challenge in the virtual marketplace. The NY AG found that platforms participate in several practices that put their own interests in tension with the interests of customers. For example, the survey data revealed that platforms' determinations of whether to list a given virtual asset were largely subjective, and no platform articulated a consistent methodology used to determine whether and why it would list a virtual asset. Further, there is a lack of transparency with respect to whether platforms receive compensation for listing a virtual currency, which inhibits customers' ability to evaluate a platform's incentives in offering or promoting a given asset. A potential conflict of interest is also posed by the finding that platforms have a range of different policies as to whether and how platform owners and employees are permitted to trade on their platform or on other platforms. Finally, some platforms disclosed that proprietary trading accounts for almost 20% of executed volume. Such high levels of proprietary trading introduces the risk that the availability of liquidity in certain assets could change without notice, including during periods of market volatility or rapid price movements. Similarly, platforms trading on their own venues may have informational and other advantages over the average trader. In sum, market participants should recognize the possibility of numerous conflicts of interest when using virtual asset trading platforms. 
  5. Security and protection of customer funds are priorities for virtual trading platforms. Given the vulnerability of virtual assets stored on trading platforms relative to traditional securities, few issues are of greater importance to customers of virtual asset trading platforms than the security of the funds entrusted to them. All responding platforms reported to offer two-factor authentication for users, with most using this enhanced security measure as a default option. Along the same lines, most participating platforms purported to keep a high percentage of virtual currency in their possession in "cold storage," which keeps private keys to virtual currency offline. Most of the respondents also disclosed that they had hired independent security consultants to conduct penetration testing and bolster their security systems. Although the Report indicates reasons for optimism about the security of trading platforms, the NY AG cautioned that customers should understand that there is still a lack of uniformity in auditing standards and that the market for insurance in connection with virtual currencies is underdeveloped.
  6. Most virtual trading platforms prohibit withdrawals during suspensions and outages, and information on the frequency of disruptions can be difficult to obtain. According to the Report, depending on the reason for a trading suspension or outage, some platforms may cancel pending trades and most platforms preclude customers from withdrawing funds during such disturbances. Consequently, the NY AG advises that customers should assume that they will not have the ability to trade or withdraw their fiat or virtual assets during trading stoppages. Additionally, despite almost every responding platform indicating that it informs customers in the event of a trading suspension or outage, only four of the nine respondents published a history of prior occurrences. The Report affirms that the accessibility of this information is crucial for customers seeking to assess the historical stability, reliability and transparency of a trading platform.

In aggregating disclosure from some of the most prominent virtual asset trading platforms, the Report provides a helpful overview of current operating procedures. Furthermore, it can also serve as a valuable resource for Canadian cryptocurrency trading platforms and their users, highlighting suggested best practices and important considerations in a rapidly expanding market.

To view original article, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions