New York Attorney General Eric Schneiderman launched the "Virtual Markets Integrity Initiative," an effort designed to protect professional and retail investors from the volatility, instability and risk associated with trading in virtual currency. The initiative kicked off with the issuance of a questionnaire to thirteen virtual currency trading platforms. The Office of the Attorney General ("OAG") is asking for information relating to operations, internal controls and safeguards designed to protect customer assets. The deadline to return the completed questionnaire is May 1, 2018.

According to the OAG, many investors do not have access to sufficient information to make informed decisions regarding the "fairness, integrity, and security" of cryptocurrency trading platforms. In the OAG's view, these platforms lack the basic market protections of traditional investing platforms. The OAG noted published reports "that indicate the sector has attracted fraudsters, market manipulators, and thieves" and that customers have complained of theft of virtual currency from their accounts, unexplained trading outages, market manipulation and inability to withdraw funds. The stated purpose of the questionnaire is to gather information so that average investors can better understand the risks posed and protections afforded them by these platforms.

The major categories of information requested in the questionnaire include:

  • ownership and control of the platform, including directors, officers and beneficial owners;
  • basic operation and fees, including custody of customer funds, margin trading policies, asset transfer processes and notional trading volume;
  • trading policies and procedures, including how priority of orders is assessed, price determination for exchanging virtual currency for fiat currency and monitoring of automated trading;
  • outages and other trading suspensions, including withdrawal procedures in the event of a suspension or outage;
  • internal controls, including restrictions on employee trading, protection of non-public information, and third-party audits;
  • privacy and money laundering risks and safeguards, including scope of information collected from customers, protection of personal information, and Know Your Customer policies and procedures;
  • protection against risks to customer funds, including insurance obtained and measures taken to protect customer funds; and
  • written materials, including terms and conditions provided to customers, a copy of a platform's initial application to the New York State Department of Financial Services for a charter or BitLicense and copies of any written rules or policies in place related to cybersecurity, privacy, information security, business continuity, and the combating of money laundering or fraud.

Commentary / Joseph V. Moreno

The breadth of information requested by the OAG's Virtual Markets Integrity Initiative, coupled with the barely two-week turnaround time that the thirteen named platforms are being permitted to submit this information, make clear that Attorney General Schneiderman expects these cryptocurrency exchanges to already have in place robust risk management programs that are ready for prime time. Firms with a bare bones paper policy should expect a public shaming and the high likelihood of additional scrutiny. The launch of this probe also makes clear that these platforms are expected to have submitted by now an application to DFS for a license and preapproval to trade virtual currency or, alternately, to be prepared to describe in detail the rules they have in place to prevent engaging in virtual currency business activity in New York. This inquiry is undoubtedly the beginning of aggressive oversight by the Attorney General of the cryptocurrency exchange industry. Platforms operating in New York are now on notice of what is expected of them and the potential consequences that await if they jumped into this business unprepared.

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