Crypto Exchanges Face Probe by New York Attorney General

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By Lydia Beyoud

The New York Attorney General’s inquiries into 13 virtual currency exchanges may serve to pull the industry further into the mainstream.

N.Y. Attorney General Eric Schneiderman’s so-called Virtual Markets Integrity Initiative, announced April 17, is yet another signal that cryptocurrency exchanges will be expected “to operate more like traditional financial intermediaries with controls and practices designed to protect consumers and ensure fair trading,” Jason Somensatto, counsel for Orrick in Washington, told Bloomberg Law.

The probe could position Schneiderman as an aggressive regulator seeking to shed further light on virtual currency exchanges, which are generally open to any investor to trade on.

“With cryptocurrency on the rise, consumers in New York and across the country have a right to transparency and accountability when they invest their money. Yet too often, consumers don’t have the basic facts they need to assess the fairness, integrity, and security of these trading platforms,” Schneiderman said in a statement.

While it’s unclear how the inquiries will ultimately play out, “more sophistication in how these companies operate, particularly those holding other people’s money, is a good thing,” said Somensatto, who represents virtual currency companies in investigations before the Justice Department and the Securities and Exchange Commission.

The information requested from cryptocurrency exchanges, including Coinbase, bitFlyer, Bittrex, Poloniex and Gemini, among others, seeks ownership and control information, fees, use of bots, trading policies and privacy and anti-money laundering controls. Those questions are consistent with the kind of information that any bank or financial intermediary usually has to deal with, Somensatto said.

Much of that information is also similar to that required for the BitLicense application through the New York Department of Financial Services, which relates to a broader set of cryptocurrency-based activities, he noted.

The NYDFS has approved six firms for virtual currency charters or licenses. The agency has granted licenses to bitFlyer USA, Coinbase Inc., XRP II and Circle Internet Financial, which owns Poloniex, and charters to Gemini Trust Company and itBit Trust Company. Five of those companies are part of the N.Y. attorney general’s probe.

Public Disclosures

Couched as a “fact-finding” effort, the attorney general’s office said it plans to publish some of the information after the May 1 response deadline.

Gemini CEO Tyler Winklevoss said in a statement he applauded the AG’s focus on the industry. “We look forward to cooperating with and submitting our responses to the questionnaire that has been circulated,” Winklevoss said. Gemini has backed the idea of a self-regulatory body for cryptocurrency exchanges. That idea has received support from Brian Quintenz, a Republican commissioner at the Commodity Futures Trading Commission.

The self-regulatory body would look to adopt and examine members of the organization for standardized practices, including in many of the areas under scrutiny by the N.Y attorney general.

Bittrex said it would also work with Schneiderman’s office, focused on “building a secure, fully-compliant environment for blockchain that encourages innovation, economic growth, and U.S. leadership in the industry,” according to an emailed statement from company spokeswoman Jennifer Wood.

Poloniex’s parent company Circle said it welcomed initiatives focused on “increasing transparency and accountability in the space” and said it would work with the attorney general’s office, Circle’s Vice President of Marketing Josh Hawkins, told Bloomberg Law by email.

The other companies that received letters didn’t immediately respond to requests for comment.

Under the Microscope

The announcement comes as cryptocurrency exchanges are already under scrutiny by federal and state regulators.

The SEC issued a March 7 statement warning investors about potentially unlawful cryptocurrency exchanges whose activities might violate securities laws.

It has also issued dozens of subpoenas to companies involved in initial coin offerings, a means of raising capital through virtual currencies to fund startups or other activities.

Coin Center, a Washington-based cryptocurrency policy group, said the AG’s inquiries highlight the overlapping regulatory regimes covering cryptocurrency exchanges.

“Far from being unregulated, these businesses must contend with state money transmission licensing laws, federal anti-money laundering law, CFTC scrutiny for commodities spot market manipulation, SEC scrutiny for securities trading,” and state attorneys general, Coin Center’s Director of Research Peter Van Valkenburgh said.

To contact the reporter on this story: Lydia Beyoud in Washington at lbeyoud@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com

For More Information

Text of the news release is at http://src.bna.com/x2z.

Text of the NY AG letter is at http://src.bna.com/x2j.

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