New York Report Exposes Gaps in Crypto Exchange Oversight

The New York State Office of the Attorney General published a sweeping examination of cryptocurrency trading platforms on September 18, 2018, finding uneven customer protections, significant conflicts of interest and limited defenses against abusive trading.

The Virtual Markets Integrity Initiative report also said the office had referred Binance, Gate.io and Kraken to the New York State Department of Financial Services for potential violations of the state’s virtual-currency regulations. That referral was a request for regulatory review, not an adjudication that any platform had broken the law.

The development mattered because trading platforms were becoming central gateways to the digital-asset market while operating without the common disclosure, surveillance and control standards associated with established securities and commodities venues. New York’s report attempted to compare those gateways using information that had generally remained unavailable to retail customers.

A voluntary review of major platforms

The attorney general’s office began the initiative in April 2018 by sending letters and questionnaires to 13 trading platforms. Nine participated: Bitfinex, bitFlyer USA, Bitstamp, Bittrex, Coinbase, Gemini, itBit, Poloniex and Tidex. The office separately invited HBUS after that platform opened for trading in July 2018.

Binance, Gate.io, Huobi and Kraken declined to participate, saying they did not permit trading from New York. The attorney general’s office said it investigated whether those platforms nevertheless accepted transactions originating in the state and, on that basis, referred Binance, Gate.io and Kraken to the Department of Financial Services.

The questionnaire covered jurisdiction, fees, trading rules, automated trading, conflicts of interest, security, insurance, withdrawals and outages. The resulting report therefore addressed how exchanges operated rather than whether bitcoin, ether or another digital asset was a sound investment.

Three areas of concern

The report’s first broad finding concerned overlapping roles. A platform could simultaneously operate a venue, execute customer orders, transfer money, trade for its own account, hold large positions and sometimes list an asset in whose performance it had a direct interest. Employees could also possess nonpublic information about order books or forthcoming listings while trading digital assets. The attorney general characterized that structure as creating substantial potential conflicts among platforms, insiders and customers.

Second, the office found that platforms generally lacked the robust real-time and historical surveillance used by traditional venues to identify suspicious trading patterns. All participating platforms reported permitting automated trading, while several reported no formal policies governing it. The report did not establish that every platform hosted manipulation; it identified controls that the regulator considered inadequate for detecting or deterring abuse.

Third, the report questioned protections for customer funds. It found no generally accepted method for auditing virtual-asset holdings and no consistent, transparent approach among platforms. Some reported outside reviews of their holdings, but commercial insurance for digital assets was uneven and its scope could be difficult for customers to assess.

What the report could not prove

The attorney general expressly described the exercise as a snapshot. Its information was supplied voluntarily, the office said it could not assure the accuracy of platform responses, and the participating group was not necessarily representative of the entire industry. Seven of the ten participating platforms had sought New York regulatory approval directly or through a subsidiary, potentially tilting the sample toward businesses with stronger controls.

Accordingly, the September 18, 2018 record supports a finding that a major state regulator identified structural weaknesses and initiated further review of three platforms. It does not support treating the report’s concerns as proven misconduct, a comprehensive audit of every exchange or evidence of a specific market-price effect.