The State of New York Attorney General just releases its Virtual Markets Integrity Initiative report on Cryptocurrency Exchanges. The purpose of the report is to look at a variety of cryptocurrency exchanges and their trading platforms. This report is looking to see how these exchanges impact residents of New York, but it could easily become a template for other states attorneys or even federal regulators.
The report focused on five topics. The first topic address jurisdiction, acceptance of currencies and fees. To see which exchanges, allow deposits and withdrawals to fiat currencies.
The second section dealt with trading policies and market fairness. This included if the exchange offered credit or margin to the customers and the exchanges’ policy on market manipulation and automated trading.
The third section dealt with conflicts of interests between the exchange’s employees and their customers. It is common that much of the fraud that occurs on these exchanges is with the cooperation of an inside person.
The fourth section inquiries about security insurance and protection of customer funds. Do the exchanges conduct security testing and do they hold some form of insurance to protect customer funds.
The fifth sections ask about the policies on suspending trading activity and how each exchange deals with customer withdrawals.
The report is highly critical of these exchanges especially when it comes to trading policies and fairness. The report pointed out the distinct difference between cryptocurrency exchanges and exchanges like the NYSE and NASDAQ. The NYSE and NASDAQ have strict reporting requirements on all transactions and their operations are subject to review and oversight by the Securities and Exchange Commission.
Cryptocurrency exchanges are operating within the United States without such oversight. The report is also critical of the exchanges lack of knowledgeable staff to educate the customer on order types and understanding the rules of the trading venue.
The report was also critical of the exchanges catering to professional traders instead of the retail trader. The fact that some exchanges offer a FIX connection would indicate this is for the use of sophisticated automated trading systems. In addition, some exchanges were rewarding traders that added liquidity which would hurt the retail less sophisticated trader.
The AG report was also critical of the exchanges for a lack of listing requirements for their exchanges. Most exchanges didn’t have any standards for listing new coins which could lead to payment for listing which some exchanges have been accused of. To be listed on exchanges like the NYSE and NASDAQ companies must meet a market capitalization first of all and are required to report quarterly earnings.
The report is a prelude to additional action. It is also a way to inform the crypto exchanges of how far behind they are when it comes to having the standards of a regulated exchange. It is also a way for regulators to let the exchanges know there are expectations of the exchanges when it comes to dealing with US citizens. Those exchanges that refused to participate will mostly be prohibited from dealing with US clients. Those that are here in the US will be expected to implement many of the items pointed in the report if they want to continue to operate in the United States.