Babbitt Column | US Prosecution Investigative Exchange and Precautions

(For more details, see also Deng Jianpeng, Sun Penglei: “Intermediary Chain Supervision and Compliance Response”, Mechanical Industry Press, 2019)

I. Investigating agencies' investigation intentions and briefs

Since the beginning of 2019, virtual currency exchanges have sent news from time to time – some exchanges are crazy to brush; some exchanges have heavy insider trading; some exchanges are suspected of money laundering. In the last month, there were news that two top 20 deals were stolen from huge amounts of virtual currency. In short, the problems of the exchange have become the focus of investors, chain and currency. In fact, as early as before, well-known procuratorial agencies in the United States have begun to investigate well-known exchanges and prepare for the next legal regulations. This paper attempts to analyze the investigation intentions, the results of the investigation, the responses of some exchanges after investigation, and the issues that should be focused on by each trading institution.

In April 2018, the Office of the Attorney General of the State of New York (OAG) concluded that as the market share of virtual money increased, New York and consumers throughout the United States had the right to gain insight into transparency and accountability when investing in virtual currency. But consumers often fail to assess the fairness, integrity, and security of these trading platforms because of the lack of basic information. On September 18, 2018, OAG released the "Virtual Market Integrity Survey Report" (hereinafter referred to as "Virtual Market Report"). [1] This virtual market research initiative is to change this and promote accountability and transparency that investors and consumers deserve in the virtual currency market.

OAG issued virtual market integrity initiative letters and questionnaires to 13 major trading platforms. The report is based on responses to letters and questionnaires from these trading platforms. The 13 trading platforms include: Bitfinex, bitFlyer USA, Bitstamp, Bittrex, Coinbase, Gemini, itBit, Poloniex, Tidex, Binance, Gate.io, Huobi Global and Kraken.

OAG invites the trading platform to voluntarily participate in the Virtual Market Integrity Initiative, and hopes that the platform will take this opportunity to provide the necessary basic information to the public. The first nine trading platforms replied to OAG's letters and questionnaires. OAG also separately invited HBUS to participate in the Virtual Market Integrity Initiative. HBUS is the platform for trading in July 2018 and is the US strategic partner of Firecoin. HBUS's response to OAG is also included in this report. The last four trading platforms (Coin, Gate.io, Firecoin Global Station and Kraken) claimed that they were not operating in New York State and refused to respond to the OAG questionnaire. OAG surveyed whether the four platforms were accepting operations in the state of New York and reported to the New York State Financial Services Authority three exchanges that may be suspected of violating New York State's virtual currency management regulations, namely, Champion, Kraken and Gate. Io.

Second, the main problems discovered by the procuratorate investigation

The “Virtual Market Report” focuses on transaction transparency, fairness and the security of the virtual asset trading platform, emphasizing the key rules and practices of the platform. The report mainly includes the following parts: jurisdiction, accepted currency, expenses; trading rules and market fairness. Sexuality; management of conflicts of interest; security, insurance and user funds protection; access, suspension and interruption of user funds.

The virtual market report mainly found the following problems: many business lines and operational roles of the trading platform may cause conflicts of interest; the trading platform did not take serious actions to prevent the abuse of trading activities; user fund protection is usually very limited or false.

OAG hopes to educate consumers by pointing out the above problems and other important considerations for users, and encourages virtual asset markets to take steps to ensure transaction integrity. As the industry matures, OAG expects the trading platform to take responsibility and work with consumer interest protectors, legislators and law enforcers to improve the transparency, security, fairness and credibility of the business.

The report hopes to provide simple and accessible information about the user's virtual asset trading platform, while allowing users to expect each trading platform to answer the following basic questions: What security measures does the platform take to prevent hackers from illegally accessing the platform and user accounts? What insurance or regulations are there on the platform to ensure that user property is not affected when virtual currency or fiat currency theft occurs? What measures does the platform take to ensure the fairness of ordinary users when dealing with professionals? How does the platform control unauthorized traders or trade abusers outside the platform? How does the platform prevent itself and its employees from using non-public information to benefit from users? How does the platform notify users of interruptions or suspensions of website visits? Under what conditions will the transaction continue? How do users access their funds when the website is inaccessible? What steps does the platform take to improve transparency, virtual assets and legal assets security, independent auditing and verification? Is the platform compliant or registered under bank regulations? Or a similar management system, such as the New York Bitlicense license?

This report does not cover all relevant aspects of the virtual asset trading platform or its risks. Whether or not the user should, or should, trade virtual currency depends on each user's own needs and experience. But in general, users should avoid platforms that do not satisfactorily answer the above questions.

OAG is vigilant in protecting New York State users from fraud and commercial abuse practices, and is no exception to the emerging virtual currency market. An important way for OAG to guard against financial risks is to learn from people who have seen fraud or abuse, or who have suffered. If consumers have experienced problems with virtual asset trading platforms, or want to report other suspected violations, I hope they can contact OAG.

Third, the relevant comments and precautions for the investigation

Looking at the report, the author believes that OAG, as a local judicial institution in the United States, has conducted a thorough study on the types of risks in the virtual currency trading market. The details and depth of the scope of the investigation are convincing. Reports include jurisdiction, new user registration information, access control, currency received, commissions, transaction types, automated algorithmic transactions, market manipulation and transaction abuse, trading platform self-transactions, platform and platform employees and users Interest conflicts, independent audits, security penetration testing, insurance, access to user funds and announcements when the platform is suspended or interrupted. Even if it is inside the industry, it is estimated that you have to sigh the scope of the OAG survey report! This 42-page report is the most comprehensive and detailed survey report of the virtual currency trading platform we know. OAG has broken the mind for the prevention and elimination of risks for the interests of New Yorkers.

As mentioned earlier in the book, on the virtual currency trading platform, ordinary retail investors are easily disadvantaged in all aspects, and the risks are inconsistent. The trading platform and major customers (or bookmakers) occupy various advantages and opportunities, and the opportunities for improper profit are special. huge. Without proper regulatory mechanisms, it is impossible to guarantee the fairness and impartiality of retail investors in transactions simply by the spontaneous adjustment of the market or the good ethics of platform executives.

In addition, some of the issues reflected in the report deserve our attention. OAG's Virtual Market Integrity Initiative Questionnaire lists 34 questions that are worthy of consumer reference when we evaluate other virtual currency trading platforms. Comply with the New York State's BitLicense regulations and obtain a license to legally operate a virtual currency trading platform in New York State. The New York State Government can issue licenses to legal platforms. However, due to the strict legal control in New York State, many trading platforms dare not blatantly start business in New York State, fearing that if the residents of New York State suffered losses on the platform, the investigation of the New York State Department of Justice will not be able to eat. go.

The OKEX, Bithumb and other platforms with the highest global trading volume do not know why it does not appear in OAG's trading platform list. I don't know how OAG chose the 13 platforms? What are the criteria for selecting a platform for investigation and when will it be investigated again?

A total of four trading platforms claim that they do not allow New York State residents to engage in related transactions and refuse to respond to OAG's questionnaire. OAG subsequently filed three exchanges with the New York State Financial Services Authority that may be suspected of violating New York State's virtual currency management regulations, namely, Coin Security, Kraken, and Gate.io, and only the Firecoin Global Station successfully passed. Will the New York Financial Services Authority take any action on these three trading platforms in the future? We will wait and see. It cannot be taken lightly that the United States has the principle of “long arm jurisdiction” in the judiciary. Once the state (or a citizen of the country) has suffered damages in the relevant transactions of the above three exchanges, the exchange may not be able to stay out of the way.

OAG repeatedly warned users in the report that the four exchanges that refused to participate in the Virtual Market Integrity Initiative may have various problems, such as the platform may charge undisclosed fees, some users may enjoy more favorable rates; the platform may not be announced All types of transactions offered to a particular trader, some of which may only be beneficial to a particular trader, and the trade performance and effectiveness of other traders may be adversely affected; there may be no restrictions on access and potential abuse of automated trading strategies, possibly for ordinary users Unfair; may charge the cost of the virtual currency; may not restrict employees or other insiders from accessing non-public or sensitive information, and do not monitor employee transactions, thereby placing users at a disadvantage; may also conduct undisclosed platform self-transactions Wait.

Finally, OAG's report reveals some interesting details that deserve industry attention:

20% of the total Coinbase transactions are internal platform self-transactions. In response, Coinbase Chief Risk Officer Mike Lempres said afterwards that he was frustrated with the report because the report said that nearly 20% of Coinbase's trading volume came from its own trading. Lempres believes that "we don't have proprietary trading, we don't trade for our own benefit, we won't do it," he explained. "In order to supplement the assets we sell, we will enter the market to buy assets and then hold them. These assets, and we do so for the purpose of considering the interests of our customers. In this way, when they come to our exchange, we can guarantee the price and guarantee to sell immediately." [2] Bitflyer US Station Internal transactions account for approximately 10% of the total trading volume of its platform.

The location of gate.io is unknown to the public, but the company has revealed to OAG that its platform operations are mainly conducted in China. We queried online and could not know the registration place of the platform from its official website, and could not know the actual controller of the platform. Unlike the well-known exchanges in China, I don’t know why gate.io has not been blocked by Chinese regulators.

bitFlyer USA, Bitstamp, Gemini, HBUS and itBit disclose to OAG: Some specific traders may enjoy a more favorable rate than ordinary traders; the details of these preferential rates do not appear in the requirements of the confidentiality agreement between the two parties. Publicly visible rate information. That is to say, large traders can enjoy secret discounts.

Of the exchanges under investigation, only one, HBUS, admitted to charging the listing fee. It acknowledges that “the listing fee is charged based on the market value of the virtual asset”.

The common type of “pending-to-single” transaction is actually more beneficial to large customers.

Only the two trading platforms Bitstamp and Poloniex limit VPN access. This means that a large number of Chinese citizens access the overseas trading platform through VPN and can successfully engage in transactions. This again shows that in the world of blockchain, it is obviously not enough to rely solely on a single sovereign state for supervision.


[1] Original text see https://ag.ny.gov/sites/default/files/vmii_report.pdf?mod=article_inline, visit time: September 30, 2018.