The New York State Office of the Attorney General (the “OAG”) released the Virtual Markets Integrity Initiative report on September 18 that investigates the vulnerability of cryptocurrency exchanges, highlighting risks, manipulation and conflicts of interest.
The initiative, launched in April, was founded to protect and inform New York residents who trade in virtual or “crypto” currency. It began when New York Attorney General Eric T. Schneideman requested information on operations, controls and logistics from thirteen cryptocurrency exchanges.
Since the OAG is responsible for law enforcement that protects investors and consumers from unfair and deceptive practices, the initiative began as a fact-finding investigation to analyse risk as well as increase transparency of platforms on the cryptocurrency market.
The recent report included nine major platforms Bitfinex (operated by iFinex Inc.), bitFlyer USA, Inc., Bitstamp, Ltd.,2 Bittrex, Inc., Coinbase, Inc., Gemini Trust Company, itBit (operated by Paxos Trust Company), Poloniex (owned by Circle Internet Financial Limited), and Tidex (operated by Elite Way Developments LLP). Clarity was prioritized throughout analysis of basic practices and functionality as well as information on customer asset security.
The study found that the absence of acknowledged strategies for examining virtual assets results in the lack of a straightforward independent review of digital currency exchanged on trades. This puts customers and clients’ finances hung on their trade accounts in danger of assaults from hacking or burglary. The report consequently addresses the issue of open assurance and the adequacy of business protection. It also addresses the question of commercial insurance to cover possible losses.
Highlighting the possibility of trade abuses, the report states: “Automated trading activities could also allow a single trader or group of traders to command multiple accounts simultaneously to obscure coordinated trading, in order to manipulate prices.”
The report stresses on automated dealers deployed by several cryptocurrency platforms. As they are not offered special conditions, other trading clients are left off guard and vulnerable. It also addresses conflicts of interest that are represented by overlapping lines of businesses within cryptocurrency trades.
As of now, the report asserts, there are trade endeavors that are not transparent while favoring certain traders. This can be seen in employees trading on their own venue, platforms issuing their own currency, deploying automated traders or accepting compensation in exchange for listing an asset or trade.
The report emphasizes the challenges in tackling suspicious trading patterns due the lack of real-time as well as historical market surveillance capabilities. Yet it also notes that there are some platforms who are trying to police the fairness and integrity of their exchange.