The New York State Attorney General, Eric T. Scheiderman has sent a letter of inquiry to thirteen different cryptocurrency exchanges or their parent companies. Those exchanges include Coinbase, Bitfinex, Bitstamp and Kraken, basically all the major exchanges offering services to U.S. customers.
The questionnaire focuses on basic operations, fees, fairness/trading policies, outages procedures, money laundering policies, security protocols, and insider trading policies (called “internal controls” in the letter).
New York State has been famous (or infamous depending on your perspective) for being proactive in cryptocurrency regulations. It was the first US state with significant regulations, passing the BitLicense in 2015.
The news was first announced on Scheiderman’s twitter and New York State’s Governmental website. It does not represent any kind of regulation or investigation into these exchanges. But it does show that New York State is still very interested in the cryptocurrency space, even after Ben Lawsky stepped down in 2015.
Predictably, Crypto Twitter was mostly angry about the news. Despite it not having any real consequences, they fear the specter of regulation and are still angry about the BitLicense.
Fuck off government goon. We want a free market.
— Stefan Borzone (@stefanborzone) April 17, 2018
you’re a goddamn jerkoff. we dont need your “protection” – we’re sophisticated enough to know what we’re doing and you’re killing our fucking rally you ivory tower pinhead overzealous liberal regulator piece of garbage
— DanielDayCrypto (@danieldaycrypto) April 17, 2018
Hi I’m a consumer and I have plenty of info. You can stay home.
— dts1186 (@dts1186) April 17, 2018
But the inquiry is more about obtaining information for potential customers than it is for the government to crack down on cryptocurrency exchanges. Most of the questions are reasonable. They focus on the use of bots, how orders are prioritized, and what the exchanges do to protect fiat and digital funds.
What Does it Mean?
The entire questionnaire is available for public viewing on the New York State Attorney General’s website and includes questions such as “Detail the policies, procedures, or technological measures you have in place, if any, concerning the use of “bots” or other forms of automated trading on your platform.” Which is something that most users of a cryptocurrency exchange would be interested in hearing.
What it possibly, but not definitively, shows is what the Attorney General of New York is interested in investigating in any future cases. The idea of insider trading, for an example, is something few exchanges touch on in their official terms and conditions. But it is something that is strictly prohibited in most traditional investment exchanges.
In 2015, I reported on a cryptocurrency being created by an exchange and then being pumped up by that exchange. While that was a particularly blatant example of insider trading done by an exchange, many assume subtler insider trading is going on all the time.
That is especially true of the exchanges with hundreds of different markets, the smaller of which are easier to manipulate.
The Attorney General issued no legal threats to the exchanges that fail to participate. They did, however, threaten public shaming once the program is complete.
“We will review and assess your responses, compare them with those of other platforms, and disclose certain information in a publicly accessible format. As part of this disclosure, we will identify any platforms that decline to provide meaningfully complete responses.”
The letter goes on to state that exchanges can request certain information be withheld from public view. But the information withheld must be “[A] response that contains a valid trade secret or may otherwise be exempt from disclosure under New York’s Freedom of Information Law.”
While much of crypto twitter was angry about the news, a few seemed to welcome it.
Finally sir, long time i was waiting for such a new.
— GiorgioVersace (@Giorgio13190) April 17, 2018
Should Crypto Advocates Cheer or Jeer?
There is an argument to be made that the Attorney General of New York should be focused on other things. Scheiderman is famous for filing lawsuits against President Donald Trump. Something some Twitter users wished he would go back to focusing on (or alternatively, they felt those lawsuits discounted any credibility he has, on cryptocurrencies or any other issue). But the move itself should not be taken as bad news for the industry.
Exchanges have been the weak point for cryptocurrencies since Bitcoin became valuable enough to warrant their use. From Mt.Gox to Mintsy to CoinCheck, if you have heard of Bitcoins being “hacked” it almost certainly has to do with an exchange either being hacked or simply disappearing with their user’s money. Bringing in some regulation to this space is sorely needed. It is simply not enough to tell users to take their cryptocurrencies out of exchanges. If a user is exchanging several currencies, they don’t necessarily want to keep several wallets and their corresponding blockchains on their computers.
Yes, it is a best practice to take your bitcoin off of an exchange as soon as you get it, but that doesn’t mean exchanges should get a pass on shady or shoddy practices. Besides, the Sheiderman letter is focused on adding more transparency, not regulation and nearly everyone agrees transparency is a good thing.
Does it Matter Long-Term?
Decentralized exchanges will prove to be an interesting factor in all of this. There are several on the market now. Though they have less volume than the large centralized exchanges, they will likely prove more difficult or even impossible to regulate. Because of that, they could be more susceptible to issues like market manipulation. On the other hand, they should be virtually impossible to hack or have an owner who disappears with the funds.
But that is an issue for another time. Currently, the most popular exchanges are of the centralized variety. They have been the source of a large number of scandals. And now the New York Attorney General is asking them some questions. It will be interesting to see which of them respond.