The NYAG’s Virtual Markets Integrity Initiative and Transparency of Cryptocurrency Exchanges

Matt Stankiewicz, Associate at The Volkov Law Group, rejoins us for another posting on cryptocurrency regulation.  Matt can be reached at mstankiewicz@volkovlaw.com.

Recently, New York Attorney General Eric T. Schneiderman launched the state’s Virtual Markets Integrity Initiative in order to garner more information and gain insight into the inner workings of cryptocurrency exchanges. To kick off the initiative, the AG’s office sent a questionnaire containing 34 questions to several of the country’s largest cryptocurrency exchanges, such as Coinbase (GDAX), Kraken, Poloniex, and Gemini.  It appears that the NYAG is seeking to understand the cryptocurrency market, how exchanges operate, and consider regulatory options with a focus on protecting investors.  The state will eventually distill the results and publish a public report on their findings.

The questionnaire hits on a lot of expected topics, and many of interest to the compliance community.  The questions are grouped into several categories including “Trading Policies and Procedures,” “Internal Controls,” and “Privacy and Money Laundering.”  The questionnaire even starts with a section regarding ownership, with basic questions focusing on beneficial owners – e.g. provide “[a]ll beneficial owners of 5% or more of your company and/or ultimate corporate parent(s), including but not limited to all Principal Stockholders and Principal Beneficiaries.”  In general, the questions do not appear to be too onerous and some of the information can already be found publicly on the Internet.  Exchanges are asked to submit their answers by the beginning of May.

Not all exchanges reacted positively to the inquiry.  Kraken slammed the inquiry, refused to participate, and demanded regulators refrain from “handing down commandments from the ivory tower.”  Kraken’s stand and animosity may make a little more sense knowing that they do not even operate in New York, having pulled out of the state after New York enacted its widely-criticized BitLicense program.  In stark contrast, other exchanges have embraced the NYAG’s inquiry.  Gemini’s CEO, Tyler Winklevoss, noted that “Gemini applauds the Attorney General’s focus on this industry and the Virtual Markets Initiative, and we look forward to cooperating with and submitting our responses to the questionnaire that has been circulated.”

As mentioned, New York has already enacted its BitLicense program, which has often come under fire from the industry.  The new Initiative follows a recent roundtable where NY lawmakers indicated they would be open to revisiting BitLicense, a seemingly implicit admission that maybe they did not get things right the first time.  In fact, a New York State Senator posed a question at the roundtable, asking attendees whether anyone in the crowd did not think BitLicense should be reformed.  There was silence for a few moments, then laughter.

This new Initiative should do well to ensure that New York’s regulations are tailored to fit the current industry landscape.  Regulators have found themselves in a difficult position, trying to protect investors while at the same time balancing the need to promote the technology and allow innovation to continue.  Unfortunately, officials may not fully understand the technology they are dealing with here, and this Initiative should be the first step towards educating the regulators.

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