NY Attorney General Announces Cryptocurrency Exchange Inquiry04/17/2018On April 17, New York Attorney General Eric T. Schneiderman sent letters to thirteen cryptocurrency exchanges requesting certain key information on their operations, fee structures, internal controls, and customer safeguards. The letters also signaled the launch of the Attorney General’s broader “Virtual Markets Integrity Initiative,” described in a press release as “a fact-finding inquiry into the policies and practices of platforms used by consumers to trade virtual or ‘crypto’ currencies like bitcoin and ether.”
The Office of the Attorney General further outlined its concerns in its press release:“Ensuring that enforcement agencies, investors, and consumers have the information they need to understand the practices and the risks on these platforms is critical, given reports of the theft of vast sums of virtual currency from customer accounts, sudden and poorly explained trading outages, possible market manipulation, and difficulties when withdrawing funds from accounts. Often, the platforms lack the basic market protections of traditional investing platforms. Moreover, the extent of disclosures to customers about trading rules, internal controls, and other basic practices varies from platform-to-platform, making it difficult or impossible for prospective users to evaluate the actual risks of trading on a particular platform.”The full text of the letters is included in the press release. Interestingly, both the letters and the press release almost entirely refer to recipient entities as “trading platforms” rather than as “exchanges.” Likewise, the Securities and Exchange Commission (the “SEC”) in a March 7 statement moved away from the market’s use of the term “exchanges” in favor of the term “platforms” when discussing services that allow investors to buy and sell digital assets, the SEC being keen to distinguish these entities from exchanges under the securities laws. The Attorney General seems to follow the SEC’s lead here.
The letters also included a questionnaire for the exchanges, with responses due May 1. “Before trading on a new platform, sophisticated investors routinely demand robust disclosures, allowing them to assess the platform’s operations and the adequacy of its policies and internal controls,” the office said. “The questionnaire delivered to the virtual currency platforms asks for similar information so that average investors can better understand the risks and protections.”
The questionnaire inquires about a variety of topics, including:
• Ownership and control“The Attorney General’s office will analyze the responses, compare them across platforms, and at the conclusion of this process, present what it learned to the public,” the office added. The questionnaire topics may also signal potential areas of regulatory interest going forward.
• Basic operations
• Fee strictures
• Trading policies and procedures
• Outages and other trading suspensions
• Internal controls
• Money laundering
• Combating suspicious trading and market manipulation
• Policies on the operation of bots
• Limitations on the use of and access to non-public trading information
• Safeguards to protect customer funds from theft, fraud, and other risks
The Attorney General’s letter cites several statutes on which the inquiry appears to rely. Most important is N.Y. Gen. Bus. Law § 352 (i.e., the “Martin Act”), which applies to offers, sales, and purchases of securities and commodities in New York. The Martin Act is an extremely broad antifraud statute that empowers the Attorney General to take action against what he considers fraudulent conduct, without having to prove that the defendant acted either intentionally or negligently. In addition, N.Y. Exec. Law § 63(12) allows the Attorney General to apply for an injunction whenever there is evidence of “repeated fraudulent or illegal acts” in violation of either state or federal law. N.Y. Gen. Bus. Law § 349 also allows the Attorney General to investigate and enjoin deceptive business practices.
At first, New York’s financial supervisor (NYDFS) was among the regulators that took the lead when it came to cryptocurrency rulemaking, both in the state and among regulators nationwide. But now, cryptocurrency ventures in New York will also need to keep an eye on the Attorney General’s office when it comes to potential cryptocurrency enforcement. In these early battles over cryptocurrency regulation, we will continue to watch how the Attorney General’s Virtual Markets Integrity Initiative fares.