‘Spring Cleaning’ Part 2: Lessons from NY OAG

Customer protection measures recommended by the Office of Attorney General (OAG).

by Alex Lee

This article provides a summarized version of the Virtual Markets Integrity Initiative Report by New York State Office of the Attorney General (OAG) published in September 2018. In particular, it focuses on the action in which a customer can take to protect his or her interest when dealing with trading platforms.

Objective of this initiative:

To educate and protect retail investors or customers of cryptocurrency trading platforms.

How this report was done:

The OAG sought voluntary participation from 13 major trading platforms. 9 participated and their responses form the basis of the report.

Three broad areas of concern:

  1. The various business lines and operational roles of trading platforms create potential conflicts of interest.
  1. Virtual asset (or cryptocurrency) trading platforms have yet to implement serious efforts to impede abusive trading activity.
  1. Protections for customer funds are often limited or illusory.

Section I: Jurisdiction, Acceptance of Currencies, and Fees.

  • The jurisdiction where a platform is incorporated or headquartered may dictate whether and how the customer can seek compensation or other legal recourse in the event his or her data is breached, customer funds are stolen, or a platform becomes insolvent.
  • Customers who find ways to circumvent the restrictions that a platform uses to block trading could find themselves without recourse in the event of a dispute with the platform, or loss of funds due to fraud, theft, or insolvency.
  • Customers should be wary of platforms that allow new customers to onboard without adequate safeguards as such venues may be susceptible to market manipulation and money laundering activities.
  • Trading platforms differ significantly in how they confirm identity and enforce their site access policies. While most participating platforms reported that they monitor access by IP address, only two purported to limit VPN access. That raises questions about the ability of trading platforms to restrict access to authorized users only.
  • Most trading platforms lack a relationship with a bank and allow only trades involving two virtual currencies. The existence of a formal banking relationship therefore offers customers with a useful indicator for evaluating the platform as traditional banks in general are subject to substantial oversight, monitoring, and insurance.
  • The “maker-taker” fee models favor professional traders over retail customers, and may create incentives that distort the market.  This allow professional traders to leverage data and speed to power sophisticated automated trading strategies which can negatively affect the trading performance of everyday, non-automated customers.
  • Customers should be aware that the fees of moving funds onto, and off of, individual platforms, may be designed as a disincentive for customers to switch platforms or exit virtual assets in response to shifting market conditions.
  • Customers should understand that trading platforms may not make their full schedule of fees available publicly and could find that transacting on those venues is more expensive than anticipated. Certain customers may receive preferential rates giving advantages over others.

Section II: Trading Policies and Market Fairness.

  • Customers should be aware that platforms may have order types offered to certain traders, some of which could preference those traders at the expense of others, and that the trading performance of other customers on those venues could be negatively affected as a result. Complex order types may give professional traders an advantage over other customers.
  • Another feature that tends to favor sophisticated, high-volume traders is the ability to “co-locate” or “cross-connect” their trading computers directly with the platform’s computers in a data center. This gives them a faster view of the platform order book which can distort trading environment to the detriment of retail customers.
  • Customers should be aware that platforms may not restrict the access and use of potentially abusive automated trading strategies. These ‘bot’ trading could create illusory orders and such artificially move the price of a particular asset, manipulate prices or negatively impact the speed or responsiveness of the platform.
  • The industry has yet to implement serious market surveillance capacities, akin to those of traditional trading venues, to detect and punish suspicious trading activity. A platform cannot take action to protect customers from market manipulation and other abuses if it is not aware of those practices in the first place.

Section III: Managing Conflicts of Interest.

  • Customers should know what standards a platform uses to evaluate the virtual assets they list. The owners and investors in several trading platforms are themselves large holders of virtual assets traded on their venue, with an attendant interest that the prices of those assets continue to rise.
  • Customers should be aware that platforms may have received compensation for listing virtual currencies on their platform and should evaluate whether that affects their decision to trade virtual currencies on those platforms.
  • Customer should understand whether and how platform owners or employees are permitted to trade on their platform or on other platforms. Trading by platform employees poses a conflict of interest on the basis of information that gives them an advantage over customers.
  • When a significant percentage of volume in one or more assets on a venue is attributable to one source i.e. proprietary trading (for instance platform provides liquidity), customers face the risk that the availability of liquidity in those assets could change, without notice and at any time. 

Section IV: Security, Insurance, and Protecting Consumer Funds.

  • Industry standards have not yet developed around what assets should be insured, against what risk, and at what price. Customers should demand more information from their trading platforms about how risks to virtual or fiat currency are insured against.
  • The industry lacks common auditing standards. Customers should understand that business operations of the trading platforms may or may not have been reviewed and / or verified by qualified third party.

Section V: Access to Customer Funds, Suspensions, and Outages.

  • Customers should familiarize themselves with how their trading platform handles open orders during a suspension or outage, or scheduled maintenance, and whether their fiat or virtual currency can be transferred or withdrawn during those times.
  • Customer should expect full disclosure of past outages or suspensions, and the reasons for those events. This is important to allow customers to evaluate the stability and reliability of a platform and assess its commitment to transparency.

Exchange operators should take necessary steps to address the above concerns by implementing enforceable and auditable policies.


The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional advice. You are advised to seek proper advice for your specific situation.

Leave a comment

eighteen − 11 =

This site uses Akismet to reduce spam. Learn how your comment data is processed.