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NYAG letters to crypto firms likely to get chilly, curt response from virtual currency firms: Q&A

Friday, April 27, 2018   (0 Comments)
Posted by: Brian Monroe
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By Brian Monroe
bmonroe@acfcs.org
April 27, 2018

After a New York law enforcement agency launched an informational fusillade aimed at virtual currency exchanges to gauge compliance, transparency and accountability, one professional believes the bureau will be disappointed with responses, and things could get downright hostile.  

The New York Attorney General’s Office (NYAG) April 17th stated it has launched a “Virtual Markets Integrity Initiative” to improve the transparency and accountability of major cryptocurrency trading platforms and to better protect virtual currency investors by querying areas including operations, internal controls, use of automated bots, actual assets and anti-money laundering (AML) processes.

The AG’s Office sent letters to 13 virtual currency exchanges so far, including Coinbase, Bitstamp, Binance and others, also attempting to uncover potential conflicts of interest, cyber defenses and ability to withstand or recover for power or data outages.  

The questionnaires ask the platforms to disclose information falling within six major topic areas:

·         (1) Ownership and Control

·         (2) Basic Operation and Fees

·         (3) Trading Policies and Procedures

·         (4) Outages and Other Suspensions of Trading

·         (5) Internal Controls

·         (6) Privacy and Money Laundering

Among other areas of interest, the questionnaires request that platforms describe their approach to combating suspicious trading and market manipulation; their policies on the operation of bots; their limitations on the use of and access to non-public trading information; and the safeguards they have in place to protect customer funds from theft, fraud, and other risks.

Specifically, in the area of fighting financial crime and compliance, the NYAG’s office is asking firms to:

·         Identify all categories of personally identifiable information and proof of identity you require before allowing a customer to trade on your platform.

·         Describe all anti-money laundering protocols you have in place, including but not limited to Know Your Customer policies and procedures.

·         Describe your policies, procedures, or other safeguards, if any, to protect the personal information and/or transaction history of customers.

Already, leaders of several of the queried companies have publicly stated their frustration with the NYAG’s action.

“The AG’s tone-deaf response shows just how bad the disconnect really is”, said Kraken CEO Jesse Powell in a rant on Twitter. “Not only are they apparently experts in what legitimate businesses desire, they are also experts in what’s important to consumers. I have a wild idea: how about we let the market decide?”

His very public decrying of the seemingly infuriating fact-finding mission took root, with other leading crypto figures sounding off, including Erik Voorhees, the Chief Executive Officer of ShapeShift.

“Jesse – thank you for taking the ethical stance and speaking up for what's right,” he wrote. “Crypto has brought more transparency to finance and protection to consumers than the last 100 years of bureaucratic nonsense that has spilled from the sewers of New York.”

ACFCS spoke with Joe Ciccolo, the founder and president of BitAML, who also advises crypto firms on federal and state AML compliance regulations, about some of the questions swirling around in the real and virtual worlds related to the NYAG’s move. Here is what he had to say:  

What do you think the NYAG did this? 

The NYAG's actions are most likely in response to the large spike in consumer complaints levied against cryptocurrency financial services companies, particularly late last year. As the U.S. dollar value of bitcoin rose rapidly, more and more consumers became interested in crypto and jumped into the market.

Unfortunately, cryptocurrency companies did not have the bandwidth and struggled mightily to scale up in response to this demand. When consumers - many of whom lacked an appreciation for the utility of crypto or simply thought they would get rich - were unable to get their most basic questions answered from crypto exchanges, they turned to regulators to lament their experiences and dissatisfaction.      

Do you think the exchanges will respond? And in how much detail?

Most will. Some will not. Generally, I think responses will be short and sweet and limited to the specific question. 

Kraken, which exited the New York market in response to the BitLicense, said it would not answer the questionnaire and claimed that the questionnaire itself validated its decision to exit New York. A bold and interesting move. We'll see how that plays out.

What legal ground does the NYAG's office have for requesting information from exchanges? Is it only because New York residents use the exchanges? 

The BitLicense gives the NYAG jurisdiction over activities in New York and residents of New York. 

What details do you think they will or can provide on AML programs and data security?

I'm not familiar with the questionnaire itself. However, if I had to speculate, the questions are likely focused on compliance controls, reporting, and infrastructure with a focus on consumer protection.  

Do the exchanges have to worry about divulging too much? Giving ammo to regulators? 

Yes, I think it’s a balancing act. Crypto financial institutions generally don't want to have a reputation for not working with or cooperating with regulators. However, there's a risk oversharing.

Further, it's difficult not to empathize with the position of these crypto financial institutions, as previous calls for cooperation led to the state's onerous and "separate but equal" money transmitter regulation for cryptos i.e. the BitLicense.

 


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