New York Attorney General Eric T. Schneiderman recently sent letters to thirteen major virtual currency trading platforms requesting extensive amounts of information regarding their operations. This broad-ranging information request seeks extensive information regarding ownership, trade execution practices, compliance programs, protection of customer funds and more. The letters initiate the Attorney General's "Virtual Markets Integrity Initiative," which has a stated intent of increasing transparency and accountability in the markets for virtual currencies.
The Attorney General's office plans to report publicly on the results of its survey. While responding to the information request is voluntary, the Attorney General plans to identify in its public report any recipient of the survey that fails to provide meaningfully complete information in response.
In addition to informing investors and exchange users, the Attorney General's office believes that enhanced transparency would (1) assist law enforcement in policing these markets and (2) influence the shape of the laws and regulations that are currently evolving to apply to virtual currencies. Thus, the letters represent a significant marking point for virtual currency exchanges, traders, brokers and developers.
Casting A Wide Net
The New York Attorney General has traditionally maintained an active and wide-ranging presence in the financial markets. Consistent with this history, the Attorney General's request letters were directed to thirteen major virtual currency exchanges. Notably, the recipients were not limited to those trading platforms that hold a license to operate as a virtual currency business in the State of New York (there are currently only four such "BitLicense" holders).
Indeed, the Attorney General's requests explicitly acknowledge that certain of the recipients may have opted not to offer services in New York in order to avoid the State's licensing requirements. Nonetheless, the Attorney General requested that these exchanges supply all responsive information, in addition to information about the methods they use in order to prevent access to customers from New York or other restricted locations.
Detailed Information Requests
The Virtual Markets Integrity Initiative questionnaires ask the thirteen exchanges to provide the Attorney General with extensive information spanning across six major topic areas. These include (1) ownership and control, (2) operation and fees, (3) trading policies and procedures, (4) outages and other trading suspensions, (5) internal controls, and (6) customer privacy and money laundering compliance. A copy of the request is available here.
The survey questions evince a particular interest in areas that have garnered significant media attention. The Attorney General cites "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." Therefore, the surveys request that the recipients provide details regarding the integrity of their platforms' operations, including details as to order execution priorities, trading suspensions, service outages, trading by automated "bots," and insider trading. Trading platforms are also requested to describe their anti-money laundering programs, their know-your-customer practices, the fiat and virtual currencies that they trade, and locations where they do and do not accept customers.
Public Reporting By The Attorney General
As noted above, responding to the survey is voluntary, but the Attorney General plans to publicly "identify any platforms that decline to provide meaningfully complete responses." As part of its overall Virtual Markets Integrity Initiative, the Attorney General intends to "analyze the responses, compare them across platforms, and, at the conclusion of this process, present what it learned to the public."1
The Attorney General's office has not specifically described how it will present what it has learned, whether in summary form or with a report that identifies particular exchanges with particular practices. However, one of the Attorney General's goals is to allow average investors to have information sufficient to allow them "to assess [a] platform's operations and the adequacy of its policies and internal controls." Thus, at this point in time, it appears likely that the Attorney General intends to publish detailed information about the operations of each exchange.
Implications For The Future
The nature and extent of the information that the Attorney General will be able to gather at this point remains unclear. However, it is likely that this inquiry is only the beginning of a comprehensive examination of cryptocurrency markets by regulatory authorities.
Certainly, it is possible that the information that the Attorney General gathers may lead to further investigations and potential enforcement actions across multiple sectors of the cryptocurrency ecosystem. However, the Virtual Markets Integrity Initiative is also likely to have a significant effect on the competitive landscape and the evolution of markets as investors and cryptocurrency users assess the information that the Attorney General makes public. In addition, the data that the Attorney General is—and is not—able to gather may affect the laws and regulations that will eventually be adopted to govern this novel technology.
Footnote
1 Respondents are permitted to request confidential treatment for trade secrets or information that is otherwise exempt from disclosure under New York's Freedom of Information Law. N.Y. Pub. Off. Law §§ 87(2)(a)-(d).
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