The New York State attorney general’s office has referred three cryptocurrency exchanges to the state’s financial regulator for possible legal action and raised concerns over price manipulation and conflicts of interest on trading platforms.
In a report on virtual currencies released Tuesday after months of information gathering, the attorney general said the exchanges — Kraken, Binance and Gate.io — may be operating without the special BitLicense that the New York Department of Financial Services requires for cryptocurrency firms. The report claims they do not have appropriate controls to prevent consumers from using their services in the state, which would violate New York law.
“We look forward to reviewing the information and referrals provided by the Attorney General,” said NYDFS Superintendent Maria Vullo in a statement. The report “underscores the value of strong state regulation and consumer protections.”
The report offers the latest spotlight on an emerging industry that federal regulators such as the Securities and Exchange Commission are already watching closely. The price of Bitcoin and other digital currencies has plummeted in the past year, due in part to negative attention from regulators.
It underscores important differences in how exchanges approach key standards and creates a roadmap for regulators in overseeing the industry.
Some of the companies have fought back against the scrutiny. When the attorney general’s office first announced the inquiry in April that led to today’s report, Kraken’s chief executive officer vociferously resisted the effort.
“The AG’s tone-deaf response shows just how bad the disconnect really is,” wrote CEO Jesse Powell after the attorney general asked for information from virtual currency exchanges. “Not only are they apparently experts in what legitimate businesses desire, they are also experts in what’s important to consumers. I have a wild idea: How about we let the market decide?”
Powell’s response is cited in the report, which notes that he also said market manipulation doesn’t matter to traders and that scams are rampant in cryptocurrencies.
Much of the information in the report was collected by directly contacting exchanges. Outside of the three referrals for investigation, the other findings could have a broad impact on the burgeoning industry.
The report concludes that “virtual asset trading platforms have yet to implement serious efforts to monitor and stop abusive or manipulative trading.”
The attorney general’s office also claims that trades made by several exchanges for their own account constitute a significant volume of activity on their platform. The report says this raises questions over whether there is sufficient liquidity on those platforms and in the markets.
Several exchanges also allow their own employees to trade on their platforms, and differ in their approach to the use of non-public information in doing so, which the report raises as a concern over potential insider trading.
The report also knocks some practices such as catering to automated and institutional traders that are also broadly accepted in traditional finance.
The Blockchain Association, a recently formed industry group that counts two of the largest U.S. exchanges among its members, said the report validates its work to establish best practices in the industry.
“We welcome all efforts to ensure consumer protection, market integrity, and ethical standards within this rapidly evolving industry,” Kristin Smith, the association’s director of external affairs, wrote in an email to POLITICO. “By working directly with regulatory bodies and policymakers, the Association hopes to increase trust, security, and transparency in the industry.”
Other industry experts also welcomed the report.
“[The New York attorney general’s office is] not anti-crypto, they’re pro-consumer,” said Stephen Palley, a partner specializing in blockchain and cryptocurrencies at the law firm Anderson Kill. Palley said increased regulatory scrutiny and standardization of practices will be necessary if cryptocurrencies are to grow more mainstream.
“This is just some of the natural part of law and commerce,” he said. “It’s neither the beginning, the middle, nor the end.”