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N.Y. crypto exchanges not safe says state’s top cop

In yet another blow to the crypto community’s hopes for a bitcoin ETF, a report from the New York Attorney General’s Office has found that many digital asset exchanges lack appropriate safeguards and consumer protections and are vulnerable to market manipulation and exploitation.

According to the Virtual Markets Integrity Initiative report, which it describes as a "fact-finding inquiry into the policies and practices of virtual asset trading platforms" the Office of the Attorney General (OAG) found that cryptocurrency exchanges are not registered under any securities laws, nor have they adopted common standards for security controls, market surveillance and consumer protection.

Moreover, given the consistency of exchange hacks, the report finds that crypto investors face a high risk of having their funds stolen and would have little to no recourse for getting their funds back

Operational issues on exchanges, such as platform outages or delays also pose risks to investors due to the volatile nature of cryptocurrencies.

Interestingly, the OAG also says that some exchanges have been linked to "deceptive and predatory practices, market manipulation and insider trading".

The report found that digital asset exchanges vary widely in their approach to security. Some exchanges have taken significant steps towards ensuring the safety and transparency of their trading operation while others have not.

Moreover, there is a lack of information users could use to assess the reliability and security of crypto exchanges.

Nine cryptocurrency exchanges that are active in New York voluntarily participated in the initiative by filling out questionnaires for the Attorney General’s Office. Bitfinex, bitFlyer, Bitstamp, Bittrex, Coinbase, Gemini, itBit, Poloniex, and Tidex took part while Binance,, Huobi, and Kraken opted not to participate.

According to the OAG, three primary areas of concern were:

  • Exchanges’ business lines and operational roles can create potential conflicts of interest.
  • There was a lack of serious efforts to impeded abusive trading practices.
  • The protection of consumer funds was not a high enough priority.

Risks for retail investors are real

While the report was not well received by the bitcoin community, it simply highlights the risk involved in trading cryptographic assets in the current trading ecosystem, which is still in its early stages.

The fact that exchanges remain relatively insecure and that fund security cannot be guaranteed is nothing new to seasoned cryptocurrency investors.

A lack of prevention of questionable trading practices is also a known issue as is the absence of fund insurance at most exchanges contributing to the high risk of holding funds ‘on exchange’.

Despite the highlighted risks being nothing new to crypto investors, they may be news to retail investors who are thinking of investing in crypto for the first time — given they are used to having a high degree of consumer protection through major banks and investment houses — and may assume that these laws also apply to cryptocurrency exchanges, which they do not.

In light of the risks for retail investors, exchanges can expect more regulation and reporting requirements coming their way in New York State and likely across the U.S.

Bitcoin ETF approval delayed

Perhaps the bigger question on the minds of bitcoin investors is whether this report will have a negative effect on the much-awaited approval of a Bitcoin ETF.

When the SEC denied the Winklevoss ETF for the second time, it made clear that the current state of the bitcoin trading ecosystem is not sufficiently transparent nor regulated for the financial regulator’s taste.

More specifically, as reported on August 22, "the SEC’s reasons for the rejection concern potential market manipulation, a lack of traditional means of detecting and deterring fraud and manipulation, and the lack of adequate surveillance-sharing agreements for the bitcoin market."

Unfortunately, for potential Bitcoin ETF providers, the Attorney General’s report reiterates the SEC’s concerns in its report, which could mean another blow to Bitcoin ETF approval efforts.

If several of the leading digital asset exchanges in the U.S. — even those who are regulated under the New York BitLicense — are not able to show that they can protect investor funds and detect, monitor and report market manipulation, it is difficult to imagine a Bitcoin ETF receiving regulatory approval any time soon.


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