Report: cryptocurrency exchanges failing to protect consumers

September 19, 2018
Chris Wheal

A new report released on Tuesday by the New York State Office of the Attorney General (OAG) warns that some exchanges may offer little in the way of protection resulting in significant risks to their customers.

The Virtual Markets Integrity Initiative report says while virtual asset exchanges have similar functions to traditional stock exchanges, private trading venues, and broker-dealers they have not registered under state or federal securities or commodities laws. The report also accuses cryptocurrency exchanges of not “implement[ing] common standards for security, internal controls, market surveillance protocols, disclosures, or other investor and consumer protections.”

The Attorney General’s office launched an initiative to protect and inform New York residents who trade in virtual or “crypto” currency. Digital assets are no longer for niche investors but now appeals to a broad swathe of investors from Wall Street firms to “mom-and-pop” retail investors.

Not a broad brush

While some exchanges have responded to safety and security and implement measures to address them others have not. When hackers infiltrated trading platforms and steal billions of dollars’ worth of virtual currency customers are left with little to no recourse.

Highlights of other risks include: common delays and outages on trading platforms with customers left unable to withdraw funds and thereby vulnerable to significant losses given volatile prices; reports linking certain trading platforms to deceptive and predatory practices, market manipulation, and insider abuses.

The catalogue of risks to consumers also include lack of access to information that would allow for assessment of the security and fairness between platforms to make comparison shopping easier. Nine of 13 platforms responded to the OAG’s questionnaire about practices and comprises much of the report.

Three taken to task?

The OAG claims that it sought voluntary participation from the exchanges. However, of the four exchanges that declined to participate because they said they did not accept trade from within New York state, three were referred to the Department of Financial Services for potential violation of New York’s virtual currency regulations after an investigation.

Binance, Gate.io, and Kraken were all referred. Kraken’s CEO Jesse Powell earlier this year famously had a public spat with former Attorney General Eric Schneiderman and refused to respond to a request for information.

In an interview Powell explained his reasons: “I wouldn’t have said anything if it wasn’t for other exchanges coming forward and saying oh this is great, we can work with the regulators and respond to this but I felt like this is the wrong kind of attitude to have we have to put our foot down somewhere we can’t just bend over backwards every time some random regulator anywhere in the world and in this case not even a regulator but law enforcement official comes forward and demands things on a deadline especially in a place we don’t even have service.”

 

Post written by Chris Wheal
Chris Wheal is editor of OpenLedger's news and features service. An award-wining business journalists himself, he runs a team of freelance journalists from across the UK and north America.

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