Virtual currency exchanges at risk of market manipulation: Report from NY Attorney General’s office

The report by NY Attorney General’s office is based on a study of several online platforms where virtual currencies, including bitcoins, are regularly traded.

According to a report published by the New York Attorney General’s office, cryptocurrency exchanges are typically plagued by poor market surveillance, lack sufficient customer protections, and have pervasive conflicts of interest.

According to the study, several online platforms where virtual currencies, including bitcoins, can be purchased as sold by individuals operate with significantly lower safeguard compared to their peers in traditional financial markets.

Further, virtual currencies are vulnerable to market manipulation and place customer funds at risk.

“As our report details, many virtual currency platforms lack the necessary policies and procedures to ensure the fairness, integrity, and security of their exchanges,” said Attorney General Barbara Underwood in a statement.

Following the finding,s the attorney general requested New York’s Department of Financial Services (NYDFS) to review whether the three exchanges operating in the state are operating within lawfully.

In April 2018, the attorney general’s office launched its Virtual Markets Integrity Initiative and asked 13 platforms to voluntarily disclose information about their practices.

Of the 13, 4 did not participate, saying they do not allow trades from within New York State.

The Attorney General’s office investigated whether the platforms did operate in the state, and has referred three – Binance, Kraken and Gate.io – to NYDFS.

The three platforms could not immediately be reached for comment.

U.S. and international regulators have begun clamping down on malpractices in the cryptocurrency market over the past year as trading in the nascent asset class boomed.

Last week, two Wall Street regulators announced a series of actions, which include levying fines against companies involved with cryptocurrencies.

Significantly, according to a ruling by a New York federal judge, prosecutors can use U.S. securities law to prosecute fraud cases involving cryptocurrency offerings.

The attorney general’s report detailed how some of these platforms conduct overlapping lines of business that present “serious conflicts of interest”, including trading for their own account on their own venues. Some platforms also issue their own virtual currencies or charge companies to list their tokens.

The study also found that “trading platforms lack a consistent and transparent approach to independently auditing the virtual currency purportedly in their possession”, making it “difficult or impossible” to confirm that the exchanges are responsibly holding customer accounts.

According to the report, while some platforms police their markets for trading abuses, others do not.

“Platforms lack robust real-time and historical market surveillance capabilities, like those found in traditional trading venues, to identify and stop suspicious trading patterns,” reads the report.

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