Making Sense of the New York AG Crypto Exchange Report
On September 18th, the New York State Attorney General’s Office released its genesis “Virtual Markets Integrity Initiative” report. The AG’s office argued there were a few areas of serious concern for crypto exchanges operating in NY’s sub-nook of the cryptoverse.
Update 9/19: Coinbase Chief Policy Office Mike Lempres says Coinbase does not engage in proprietary trading, rather it fills Coinbase Customer orders from Coinbase Markets.
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New York State’s Attorney General Barbara Underwood has released an exchange-focused Virtual Markets Integrity Initiative report, an inaugural measure to “protect and inform New York residents who trade in virtual or ‘crypto’ currency.”
Earlier this year, we sent letters to major cryptocurrency trading platforms requesting key information on how they operate.
— NY AG Underwood (@NewYorkStateAG) September 18, 2018
In the report, NY AG Underwood and her team identified three areas that were particularly problematic for crypto exchanges active in their state. These areas included 1) “abusive trading,” 2) “pervasive conflicts of interest“, and 3) “limited protection of funds” for customers.
The Name of the Game
Describing the purview of their report, the NY AG’s office, or OAG, said the findings were centered around protecting investors:
“The New York State Office of the Attorney General (the “OAG”) launched the Virtual Markets Integrity Initiative to protect and inform New York residents who trade in virtual or “crypto” currency. As a medium of exchange, an investment product, a technology, and an emerging economic sector, virtual currency is complex and evolving rapidly. The OAG’s Initiative, however, proceeds from a fundamental principle: consumers and investors deserve to understand how their financial service providers operate, protect customer funds, and ensure the integrity of transactions.”
As such, the OAG reached out to several cryptocurrency exchanges with active operations in America to conduct their fact-finding mission. Several prominent exchanges accepted the queries, including Bitfinex, bitFlyer USA, Bitstamp, Bittex, Coinbase, Gemini, itBit, Poloniex, Tidex, and HBUS. On the flip side, Binance, Huobi Global Ltd., Gate.io, and Kraken declined OAG’s effort, each respectively saying “they do not allow trading from New York.”
“This Report does not address whether virtual currency represents a sound investment decision,” the OAG moreover noted.
First and foremost, the OAG said that crypto exchanges currently operating in America exhibited numerous conflicts of interest. These conflicts resulted from these exchanges’ varied services, the report argued.
For instance, the OAG said that most of the exchanges surveyed were simultaneously trading platforms, broker-dealers, money-transmitters, proprietary traders, crypto hodlers, and, at times, asset issuers.
“Each role has a markedly different set of incentives, introducing substantial potential for conflicts between the interests of the platform, platform insiders, and platform customers,” the OAG said accordingly.
The AG’s office also noted that “certain trading platforms deny any responsibility for stopping traders from artificially affecting prices” and that “several do not claim to do any independent auditing of their virtual currency holdings at all.”
The OAG also referred three exchanges — Binance, Gate.io, and Kraken — to the NY Department of Financial Services (DFS) for letting traders in New York unlawfully use their platforms.
Exclusive: NY AG’s office releases crypto-investigation report. Finds many exchanges open to manipulation, put customers at risk. Refers 3 (Kraken, Binance, https://t.co/W6qI6fHfN8) to NY DFS for unlawfully operating in NY. https://t.co/0yuoPXMYYl #bitcoin
— Paul Vigna (@paulvigna) September 18, 2018
20 Percent of Coinbase Trades Are Coinbase’s, Lempres Pushes Back on ‘Self-Trading’
At one point in the report, the OAG reported that Coinbase “disclosed that almost twenty percent of executed volume on its platform was attributable to its own trading.”
The report said the finding, among others, demonstrated that “the natural market for virtual currencies” may not be as robust as it appears on the surface.
Some in the space decried the 20 percent figure, suggesting the dynamic wasn’t wholesome.
Fun fact from the NY atty gen’l. Coinbase has a prop desk that actively trades against its clients. 20% of all trades executed on the Coinbase platform were made by their prop desk. Just burn crypto down and start over. I’m serious. https://t.co/AmCdKJWwiy
— Ben Hunt (@EpsilonTheory) September 18, 2018
Coinbase Chief Policy Officer Mike Lempres has since pushed back on such suggestions, issuing a new blog post wherein he formally contested the allegations of proprietary trading. Lempres wrote:
“Coinbase does not trade for the benefit of the company on a proprietary basis. In order to provide an easy-to-use customer experience, Coinbase Consumer quotes a price and then quickly fills the order from our exchange platform (Coinbase Markets). This takes advantage of the liquidity provided by the entire Coinbase ecosystem.
When Coinbase executes these trades, it does so on behalf of Coinbase Consumer customers, not itself.”
What’s It All About?
In NY, it’s play by the rules or fall by the wayside for cryptocurrency exchanges, a dynamic typified by the state’s hotly contested BitLicense regulatory model, wherein the NY DFS has digital asset exchanges apply for a special operating license.
The report in question once again highlighted that it’s BitLicense or the highway for exchanges in NY:
“Pursuant to DFS requirements, licensed virtual currency firms must maintain policies and practices designed to, among other things, protect deposited funds, prevent money laundering and illegal activity, and respond to other risks.”
What’s your take? Are you surprised by the crux of the report? Sound off in the comments below.
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