The Attorney General’s Office of the State of New York received and analyzed the reports from 10 out of the 13 crypto firms that it requested to give detailed report on their work, crypto-instruments and organizational processes. Gateio, Kraken, and Binance are the three firms that refused to reply because they are not in the USA.
The CEO of Binance, Changpeng Zhao, said that it’s too minor case to make any comment. The founder of Kraken, Jesse Powell, was very sarcastic about the situation and USA officers, while Gateio stated that they are China based company. The statement by Gateio makes me wonder if they remember that China prohibited such activity a year ago.
On the surface, these arguments sound strange, but they are actually legitimate. The Attorney General's Office has received an occasion to apply to the Financial Services Department of the same state of New York for now, and if it is eventually found out that these companies are clients of the three exchange in NY, they may suffer greatly for it.
As for the 10 exchanges (basically crypto-trading platforms) that submitted their report (Bitfinex, bitFlyer USA, Bitstamp, Bittrex, Coinbase, Gemini, itBit, Poloniex, Tidex and HBUS), it is not expected that they operate in strict accordance with the detailed and well thought-out set of rules that were designed for the LSE, NYSE and others.
However, the result certainly exceeded expectations.
First of all, there are questions about the little amount of information that one is required to give during the registration process before one can commence trading.
Secondly, although the IP addresses of users are monitored by all crypto-exchanges, only Bitstamp and Poloniex, prohibited their clients from using VPN.
Also, half of the exchanges charge the same commission rate from both parties of the transaction, while half make use of the maker-taker model. Customers of Bitfinex, Coinbase, Gemini, itBit, Poloniex should be aware of the fact that the transaction participant that opened the order (i.e. "Creating" liquidity) pays a lower commission rate than the party to the transaction, who take this liquidity.
According to the Prosecutor General's Office of New York, such a model can create preferences for professional traders at the expense of amateurs in various ways.
Only one of the interrogated exchanges (Bittrex) stated that it does not offer customers who perform large volumes of transactions discounts, while Bitstamp, bitFlyer USA, Gemini, HBUS and itBit frankly acknowledged that traders who carry out large volumes of transactions can obtain certain discounts in bilateral agreements with the exchange. The amounts of these discounts are, however, not disclosed in the documents and rules that are available to all customers.
As for insider trading, the crypto-exchanges, unlike regular exchanges, permit their own employees to participate in the bidding.
A formal policy to prevent maneuvering in the market exists in only four exchanges (Bittrex, Coinbase, Gemini and HBUS). Furthermore, there is a formal ban imposed by all exchanges on the opening of multiple accounts by one user. However, this can easily be evaded if the KYC procedures are not adequately developed.
In terms of security systems, crypto-exchanges protect and reluctantly share their digital assets and customer data for obvious reasons. Thus, they all reported that they offer customers a two-factor authentication system, which is optional on only two sites (Bitfinex and Tidex). Some exchanges also offer customers the option to add their verified IP addresses to the "white lists".
The hacking of exchanges that have occurred in the past has taught market operators to try as much as possible to keep most of their assets in "cold wallets". Most of the exchanges that were interviewed also revealed that they do invite external experts to test the security of their systems and identify potential vulnerabilities.
Some of the market participants have realized the need to insure their assets but due to the infantile age of the industry, there is a lack of clear information about which assets are better to insure, the form of risks to insure the assets against, and how much it may cost to insure these assets. The audit also faces similar challenges as the stock exchange as a whole does not object to this, and is yet to work out appropriate audit standards.
We are just at the very beginning