A deep dive into the NY attorney general’s Virtual Markets Integrity Report

  • September 21, 2018
  • 12:01 am ET
  • Robert Hirsch

The New York State Office of the Attorney General launched the Virtual Markets Integrity Initiative to protect and inform New York residents who trade in cryptocurrency.

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The Attorney General of New York thinks she knows what’s good for you… And she may be right. On September 18th Attorney General Barbara Underwood tweeted this out:

The history of cryptocurrencies and their continual conflict with New York State is heavily documented. It’s even in a movie where you can watch snide authoritarians smirk as they revel in the idea that they can get to control just one more thing that they had nothing to do with. So it comes as no surprise that the attorney general of New York thinks she has authority over exchanges that reside all over the world and over tradable assets that do not have a centralized authority, such as cryptocurrencies. This article summarizes her report. Its a bit long, but it’s far shorter than the actual report.

In reality, no exchanges had any reason to comply with her demands for information, except those that wished to do direct business in NYS such as Gemini and itBit, who are headquartered there. However, many exchanges did, in fact, respond to her inquiries.

Inquiries were sent out to 13 exchanges, nine of them responded with completed questionnaires, and 4 of them, Binance, Kraken, Gate.io and Huobi Global, block NYS residents (as do some of the ones who did respond) and declined to answer. However, one of the respondents is Huobi’s US arm HBUS, so the relevant group did respond.

Throughout the document you will find little warnings like this:

These comments are useless. There are dozens of other exchanges and they too “may not…” do whatever thing the AG thinks protects the people. They also may. Who knows? Certainly not the AG. If she has an accusation to make, then she should make it.

One major exchange that was not contacted is Bitmex, which is located in the Seychelles, and is also not available to US traders which is unfortunate, because it is an awesome, very advanced trading platform. Other exchanges, that operate differently than she is used to like Shapeshift and Flypme, were also not mentioned.

The Virtual Markets Integrity Report can be found here for you own reading. The goal of the report is to compare the state of crypto exchanges with the state of highly regulated, slow moving, securities exchanges that have been around for centuries. Seriously.

That said, the report is well written, highly informative and supplies tools that you can use to evaluate various exchanges. Disregarding the incendiary, state-centric conclusions, it’s a good piece of work. They start out by saying they are not making any assessment as to whether cryptos have value. They are simply trying to evaluate the trading platforms. Frankly, the space needs some sort of certification or at least respected rating system for exchange. There are some, but they are usually just some stars (by vote? By secret rating person?) and a blurb. None of them go into this sort of detail nor are they dedicated to review based on safety of users funds.

Geographical Authorized Use

The report discusses which states you can and can’t use. It’s a live handy map of the US where you can click the exchange and see which states have access to it.

Poloniex can be used everywhere in the US except New York, Washington, and New Hampshire

Bitfinex has rightly given up on the US market

Of course, most people know that using a VPN (Virtual Private Network software such as Nord VPN or PIA) gets around most of these restrictions. Some exchanges, like Poloniex and BitStamp, even monitor connections for known VPN IP addresses. The AG seems to argue that its the responsibility of the exchange to control for this. Once again, unless an exchange needs to comply with NYS laws due to having direct business operations there, there is no reason for them to filter out VPN connections. The AG is once again thinking that NYS rules apply globally. If she thinks these sites are bad for her state, she should be appealing to the state government to limit connections from these sites into the state. North Korea can do it, why can’t she? Won’t that be a fun battle to watch?

Fiat on-ramping

There is another handy chart supplied by the report. It is mentioned that exchanges that accept fiat have relationships with a bank. Thus, becuase banks are so awesome, are highly regulated, monitored, insured, and don’t at all cause conflict around the world (sarcastrophe), any exhcange that offers fiat on-ramping to the cryptospace is a more reliable player. Frankly, this chart is handy because it is a nice list of exchanges that take fiat.


Probably the most useless section in the entire report is the section that covers fees. The entire text is written in such a way as to make the fee structure of these exchanges as something dark and scary. Not mentioned, even once, is the fact that on every one of the exchanges your fee is specifically called out when you want to withdraw. It has an irrelevant chart that basically says “different exchanges charge different fees for different things”. It does call out the exchanges that don’t charge fees for certain things, which is nice. But what would have been nicer is some work towards the relative costs of using the exchanges. Nothing like this is to be found anywhere, making the section not helpful to anyone. It’s as if she forgot that stock market exchanges and banks charge fees for transfer of funds and also employ preferential rates depending on things like size of deposits or holdings.

Trading policies and Market Fairness

The report describes many of the leaps and hurdles that registered and licensed stack exchanges must go through in order to operate. These barriers to entry is why there are so few exchanges and why they don’t innovate. Meanwhile crypto exchanges have brought professional features to every day users. The report suggests that this is bad, because Joe Six Pack is not performing their trades through licensed traders, who definitely look out for their customers like we all saw in “The Big Short” , “Wolf of Wall Street”, “Boiler Room” and so forth. Having advanced tools available to everyone who are free to use them is a sign of an advanced society, not one with white towers and glass ceilings such as wall street. If professional traders are better then amateur traders, then thats hows it is. But at least now amateur traders have access to advanced tools and wide spread information about how to use them all over the internet, instead of locked up in some Series 7 books you have to pay thousands of dollars to get.

It’s shocking to see how the availablity of advanced trading features is somehow contorted into a conclusion that crypto exchanges are preferentially constructed for the benefit of professional traders. They are giving tools to everyone that professionals have built up walls around to protect their own interests. That said, another nice little live chart is contained in the report.

It’s not just crypto…

Bots and Market Manipulation and Conflicts of Interest

This is the devil in everything around the world. From LIBOR manipulation, to credit default swaps, to facilitating money laundering, more money laundering, Ponzi schemes, market manipulation, and more market manipulation, it’s pretty clear that all the regulation in the world will not stop bots and market manipulation. It won’t even curb it.

Meanwhile, in crypto, people are rightfully skeptical of exchanges. As they provide better security, and seek to empower everyone equally, good exchanges become well known and used, while bad ones get refered to quickly as scams. It’s not in an exchanges best interest to allow themselves to be manipulated. Thus you will see efforts by better exchanges to prevent their products from being manipulated. However, these products havent even existed for a decade. Undoubtedly, like tranditional investing platforms still are, crypto exchanges are, in fact, being manipulated…often. It is not different with regard to the power of an individual investor in stocks versus the whims of the large investment firms. Smart money moves with the big money.

Yes, there are bots. Lots of them. Yes, there are pump and dump schemes (often called “signals” ironically). Yes, we still don’t know if Tether is backed up by an actual stack of money in Puerto Rico. Should we accept the status quo for crypto? Of course not! Should we be aware of the situation? Of course! But is it at easy to manipulate as the OAG seems to think? The SEC shares the same concern and the act of manipulation has been claimed, for a number of reasons, to be cost prohibitive to manipulate.

The OAG points out 4 avenues of conflict of interest these are:

  • Standards applied when considering whether to list a virtual assets;
  • Compensation received for listing virtual assets;
  • Policies and procedures regarding platform employee trading;
  • Proprietary company trading on the venue.

Obviously, the main reason that a coin gets listed on an exchange is because people want to trade it. But the concern is about if the exchange gets paid to list a coin. Of course it does, and sometimes it doesn’t. The AG is looking for a standard an exchange employs and few of them actually have one. Zhao from Binance has a pretty transparent process for this: “If I like it, we will list it!”

Meanwhile, even as admitted in the Virtual Markets document, other exchanges are working towards being transparent about how coins are listed. Without a doubt, having a known process to get listed on an exchange is helpful to the entire community. Right now there is everything between “We will list everything” (HitBTC) to “We list at the whims of our leader” (Binance).

As for the rest of the conflict of interest, it’s mostly about banning exchange owners and employees from using the exchange itself. By creating a barrier to this, all that will happen is that these people will find middlemen to do this trading. Like how the stock market works now.

Thank you AG Underwood for pointing out that manipulation is bad, and that most exchanges do little or nothing about that. But we knew that already. Has regulation helped prevent manipulation in other investment fields? I don’t think it’s clear that it does.

Customer Protection

The OAG failed to make one of her nifty live diagrams here and it would have been helpful. There are a number of features that exchanges use to protect their clients, and with time, they have certainly gotten better at it, fraud and exchange hacking happens less often and for smaller amounts ever since the great Mt Gox disaster. These features include two factor authentication, white IP lists, cold storage, strong penetration testing, captcha, and frankly other methods not listed in the document.

The authors don’t seem to have a problem with the methods themselves, just that they may not be mandatory to use. It would have been nice for them to actually experience the difference between cryptopia and bitfinex because some sites actually feedback to clients their relative strength of their account security and some do not. Further, it’s odd that she doesn’t mention that crypto culture has a mantra, “Don’t leave coins on an exchange”. There is a reason for that.

On insuranthe ce, the OAG makes an odd comparison. The document lists reasons why individuals carry insurance to protect themselves (or in NY, must carry insurance). I doubt very much that any exchange would have a problem with individuals carrying insurance for their crypto activities. But then she turns around and desribes that companies must carry insurance for their clients. I’m not sure how she gets from point A to point B on that one, other than in NYS, many companies are forced to carry insurance for their clients. She rightly points out that there is no insurance to buy, thus there is no insurance in crypto. Maybe she hasn’t seen these signs from the industry she seems to be defending?

It’s not just crypto…

Access to funds

Having access to funds and being able to move them is a huge issue….in regulated banking. Consider: I have 50,000 worth of EOS in a wallet (I don’t really) and I want to pay it to you. I put in your address and seconds later you have it. I didn’t have to sign forms. You didn’t have to wait 3–5 days for an ACH. I didn’t have to get approval to move it from some dude who is thinking about his date tonight. No one could impose a limit on how much I moved. Cryptocurrency are as liquid as possible for value exchange. It’s far better than cash, far better than banking. But assets on an exchange is an entirely different matter.

Crypto exchanges, unlike NASDAQ or NYSE, operate 24/7. It’s a radical difference and uptime is far harder to maintain. That said, uptime is generally not reported, and having assets frozen on an exchange is an extremely frustrating phenomenon. You can compare the service about problems with moving funds with a broker versus with an exchange. Most brokerage houses are really helpful and friendly and patient. I do not think there is a single crypto exchange that will allow you to talk to a person. Most of them address customer service issues on a scale of weeks or months.

Much of this is due to the explosion in usage of exchanges in the last year. Exchanges can be pretty small operations. Dealing with a hundred thousand clients is a lot of work. The OAG is right to point out that this is an area that needs a lot of work to be palatable for most people.

Their Conclusion

The OAG ends their report with 8 questions to consider before using an exchange. With the knowledge that getting customer support is all but impossible for these exchanges, the idea that you can ask these questions to anyone at an exchange is preposterous. Further, these questions should be asked of other financial institutions from which you would get similar answers. Frankly, I think they are mostly irrelevant questions. Crypto exchanges work on reputation, not government contrived regulations. Thats why some exchanges have little or now volume (meaning collective risk to people is low). Knowing this, they remark:

As a general matter, though, customers would do well to avoid platforms that cannot satisfactorily answer the questions posed in this Report.

Which is to say, “stay out of cryptocurrency exchanges”. More remarkably they maintain:

The OAG remains vigilant when it comes to protecting New York customers from fraud and abusive business practices.

Right. And if this were true, they would be working out how to prevent New Yorkers from accessing sites. Is that what they are proposing? Not even close.

How anyone can interpret this as anything but retribution for not acknowledging the OAG’s self perceived authority over the world is beyond me. None of those companies operate in New York. None of them allow New Yorkers to access their platforms (yes, VPN gets around that in most cases). What about the dozens of other exchanges they didn’t ask for information from? This is clearly a witchhunt to make exchanges fear the NY OAG. Has it worked?

It doesn’t seem like Kraken cares, and they are quick to correct obvious errors in the OAGs assumptions.

Coinbase also had to correct part of the report.

Coinbase does not trade for the benefit of the company on a proprietary basis. In order to provide an easy-to-use customer experience, Coinbase Consumer quotes a price and then quickly fills the order from our exchange platform (Coinbase Markets). This takes advantage of the liquidity provided by the entire Coinbase ecosystem.

When Coinbase executes these trades, it does so on behalf of Coinbase Consumer customers, not itself.


Without a doubt, this report is both desired and needed for people who are in crypto or want to get into it to understand the atmosphere in the space. But to be clear, considering the widespread growth of exchanges and new cryptocurrencies, the rate at which coins are stolen and exchanges are hacked have actually been dropping, with the Mt. Gox hack still reigning supreme. The confiscation of bitcoin on Silk Road remains one of the largest involuntary transfer of coins in history. The scene for cryptocurrency clearly leaves more to be desired but it is measurably improving.

Further, most of the hacks, most of the issues with exchanges and the fear of abuse have to do wth exchanges run by people. The OAG didn’t even mention decnetralized exchanges that dont exist in any one location. Could it be becuase she can’t “refer [the platforms] to the New York State Department of Financial Services for possibly operating unlawfully in New York”?

It’s great to inform consumers of potential issues. It’s even great to certify some exchanges as “NYS approved” and reject the certification for other exhcanges if that is what she wishes. Her attempt to retaliate against exchanges that didn’t heed her authority is sadly, expected, ridiculous, and a waste of time and money.

Robert Hirsch
About the Author
Robert Hirsch

Robert Hirsch earned a Ph.D. in mechanical engineering from Rensselaer Polytechnic Institute and currently lives in Puerto Rico pursuing multiple projects in blockchain, aquaponics, writing and product development. His previous projects include work in special effects on movies such as Hook, Radio Flyer, and Operation Dumbo Drop, product development in the fuel cell and hydrogen industries as well as writing a couple of steampunk and sci-fi books.

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