This week New York Attorney General Eric Schneiderman launched a “Virtual Markets Integrity Initiative” by sending letters to thirteen virtual currency trading platforms asking them to respond to a questionnaire requesting information on their ownership, operations, and customer safeguards. The NYAG said in a statement that the letters are part of a broader effort “to increase transparency and accountability as it relates to the platforms retail investors rely on to trade virtual currency, and better inform enforcement agencies, investors, and consumers.” The questionnaire asks the trading platforms to disclose information regarding six topics: (1) ownership and control; (2) basic operation and fees; (3) trading policies and procedures; (4) outages and other suspensions of trading; (5) internal controls; and (6) privacy and money laundering. The NYAG requests that the trading platforms respond to the questionnaire by May 1 and states it will present its analysis and conclusions from the inquiries to the public.
Although the inquiries are not part of any publicly announced formal investigation, the “Initiative” and its focus on cryptocurrency exchanges rather than issuers, continues the trend of federal and state regulators focusing on multiple aspects of the cryptocurrency industry. We previously discussed the SEC’s statements and Massachusetts’s “aggressive sweep” of the cryptocurrency industry. Despite the relatively informal nature of the NYAG request, it is possible that this could be a prelude to more formal NYAG investigations of trading platforms or ICOs based on the information provided by the exchanges. For this reason, recipients of the questionnaire should take the questionnaire seriously. Trading platforms responding to the questionnaire should also take this as an opportunity to reflect upon the adequacy of their policies, procedures, and controls and, an opportunity to make improvements if needed.
While this appears to be the first time the NYAG has publicly announced a focus on cryptocurrency, other New York regulators have been active in this space for some time. In 2015, the New York Department of Financial Services imposed its cryptocurrency regulatory framework and BitLicense, which placed new licensing requirements on cryptocurrencies, including a 30-page application, a $5000 fee, and know-your-customer requirements that greatly reduced the virtual currency market in the state. In February 2018, the Superintendent of the New York Department of Financial Services issued guidance reminding licensed entities that they need to implement measures designed to detect, prevent and respond to fraud and that those licensed must be particularly vigilant about market manipulation.