The state attorney general’s office has referred three virtual currency trading platforms to the state Department of Financial Services for potential violations of state regulations.
Binance, Gate.io, and Kraken were referred to the agency after they told state investigators they do not allow trading of virtual currencies from New York and declined to participate in a report on the integrity of virtual currency markets, which was released on Tuesday.
According to the report, the attorney general’s office investigated whether the three platforms accepted trades from within New York after they declined to participate. Based on that investigation, the three platforms were referred to DFS for further review. The report did not explicitly say which state regulations the platforms may have violated.
None of the three trading platforms immediately responded to a request for comment.
New York has taken steps in recent years to regulate virtual currencies, which were really only manifested over the last decade. The state does not allow virtual currencies to be traded freely within its borders. Each virtual currency must obtain a so-called BitLicense, which allows it to be traded and used as currency in New York.
The report itself found significant holes in a market that still remains widely unregulated despite the state’s efforts. The findings were based on answers received from 10 virtual currency trading platforms that allow trading from New York.
Those platforms, for example, have done little to curb abusive or manipulative trading practices, the report said. Some allow—and even encourage—the use of certain ‘bots,’ or algorithmic trading, that can control significant shares of a virtual currency in rapid movements.
That may put retail traders at a disadvantage in markets where they are trading against a line of code, rather than other consumers, the report said. Few platforms reported having a formal policy in place to detect and penalize trading behavior that is intended to shift the market. That puts consumers at risk when users are not deterred from controlling the market and consequently jeopardizing the financial well-being of other traders, the report said.
“Because the prices of virtual assets move in concert across different venues, manipulative activity on one venue affects prices and liquidity on other venues,” the report said. “When any venue tolerates manipulative or abusive conduct, the integrity of the entire market is at risk.”
All 10 platforms said they have a policy that prohibits a single user from opening multiple accounts, which they claimed helps prevent manipulative trading, the report said.
There’s also an accepted practice among trading platforms where the platform, its owners, and its employees trade on their own venue, and at times in volumes that make up a significant portion of total trading, the report said. The practice is similar to insider trading on the stock market. That’s another situation where retail traders are put at risk during times of rapid price movement.
The report suggested the practice could be avoided if platforms institute a policy that bans employees from trading based on information that may give them an advantage over other consumers, such as nonpublic news, information about the identities of certain customers and other information.
Several platforms also said they do not independently audit the virtual currency they claim to possess, which makes it difficult to confirm whether those platforms are responsibly holding their customers’ virtual assets as claimed, the report said.
There is no insurance if a virtual currency trading platform is hacked, for example. Traditional banks have FDIC insurance that protects a customer’s funds in the event of a breach. There is no such public protection for virtual currency.
“And unlike robbing a bank or stealing a physical wallet, theft of a virtual asset can be accomplished by someone sitting at a computer in a jurisdiction far removed from effective law enforcement,” the report said.
The findings are the result of a survey sent to more than a dozen virtual currency trading platforms by the attorney general’s office seeking information on their operations, internal controls and customer safeguards. Ten chose to participate in the survey, including Bitfinex, bitFlyer USA, Inc., Bitstamp Ltd., Bittrex, Inc., Coinbase, Inc., Gemini Trust Co., HBUS Inc., itBit, Poloniex, and Tidex.
The survey asked platforms about their ownership and control, trading policies and procedures, privacy protections, and more.
Underwood said in a statement with the report on Tuesday that it should be used as a tool for consumers who may be interested in buying virtual currency.
“New Yorkers deserve basic transparency and accountability when they invest—whether on the New York Stock Exchange or on a cryptocurrency platform. Yet, as our report details, many virtual currency platforms lack the necessary policies and procedures to ensure the fairness, integrity, and security of their exchanges,” Underwood said. “With this report, we hope to give New Yorkers the tools they need to make educated decisions on whether to entrust their money to a cryptocurrency platform and to help protect themselves against theft, fraud, and abuse.”