The New York State Office of the Attorney General (OAG) has bad news for crypto traders. The authority has examined numerous crypto exchanges and has reached an unflattering conclusion – most exchanges lack basic consumer protections in place and are vulnerable to manipulation, according to the report Virtual Markets Integrity Initiative.
The OAG motive for an investigation has to do with a fundamental principle of consumers and investors deserving “to understand how their financial service providers operate, protect customer funds, and ensure the integrity of transactions.”
It is stated in the report that many of the exchanges chose to cooperate with the OAG. These include Bitfinex, bitFlyer USA, Inc., Bitstamp, Ltd.,2 Bittrex, Inc., Coinbase, Inc., Gemini Trust Company, itBit, Polonie, and Tidex. HBUS also jumped on board. However, Binance Limited, Gate., Huobi Global Limited, and Kraken refused to participate because they allegedly do not allow trading from New York. The OAG separately looked into their claims and believes that these exhanges might be potentially violating New York’s virtual currency regulations.
As part of the investigation, the OAG examined, among many other, security-related questions, for example, whether the platform conducts independent testing to ensure adequate IT security against threats and hackers and whether the platform has insurance that would cover virtual currency losses in the event of theft or hacking?
The key findings of the report are not overly positive. Thus it has turned out that virtual asset trading platforms often engage in several lines of business. In a traditional trading environment, for example, this is not welcomed with authorities either restricting or carefully monitoring these types of developments.
Then the OAG stated that exchanges need to take measures that would effectively impede abusive trading activity, for example, trade which is carried out by bots in order to artificially influence market prices. Exchanges should also better protect funds which are stored on their platforms and enhance transparency which is in poor condition at the moment. Hence the exchanges should encourage independent auditing.
Remember to pose questions
Security-wise, the news are perhaps the least encouraging. Especially taking into account that this year alone three major exchanges, including Bithumb, Bancor, Coincheck have been hacked with MyEtherwallet further fanning the flames by stating that it neutralizes 40 hacking attacks a week. The OAG has established that the customers of most exchanges “are highly exposed in the event of a hack or unauthorized withdrawal.” Essentially, this means that there are no rigid rules for covering potential crypto losses in a result of hack. You can lose all of your money at any time.
While the OAG makes it clear that crypto exchanges are nowhere close to immaculate, it also notes that the obtained results should not be excessively generalized. This is due to the fact that the OAG analyzed solely a fraction of exchanges present on the market and has relied on the information provided by the operators.
Concurrently, the OAG outlines a list of questions that a crypto trader should ask oneself before using an exchange. For example, “what security measures are in place to stop hackers from unlawfully accessing the platform or particular customer accounts?” And/or does the company have insurance and how does it keep unauthorized or abusive traders off the venue? Finally, is the platform “registered under, banking regulations or a similar regime – for instance, the New York BitLicense regulations?”
These simple measures combined with a more rational approach to disclosing information about your crypto funds on the Internet would be a first step in the right direction.