The adage of “It is better to ask for forgiveness than ask for permission” is not a good model when forming an exchange.
Fornaro Law is monitoring a recent investigation initiated by the New York Attorney General into cryptocurrency exchanges. New York Attorney General Eric Schneiderman has launched a far reaching investigation into the operations and consumer protection protocols established by certain cryptocurrency exchanges.
It is clear that the rampant formation of exchanges without first seeking guidance is a problem for everyone. Ignoring regulation is not going to work. Creating a plan of action and a deep understanding of regulation is the first step to launching an exchange. The increased formation rate of exchanges even after all of the government activity is madness. Taking a step back, hiring an attorney and determining how to navigate through the regulation is the first step.
Even now, Poloniex (recently purchased by Circle) is seeking proper registration as an exchange with the SEC. A good move, especially in light of the recent wave of governmental scrutiny.
Cryptocurrency exchanges have been of particular interest to regulators recently. Anyone observing the space has noticed that there has been a concerted attempt by government agencies to gather information from these organizations. The Securities and Exchange Commission (“SEC”) has been vocal about its interest in cryptocurrency exchanges. In fact, the SEC issued subpoenas to certain cryptocurrency companies in February. The IRS has also sought to collect information from Coinbase. Now, Schneiderman is jumping into the fray under the guise of consumer protection.
Yesterday, Schneiderman’s office announced that it has launched an investigation into cryptocurrency exchanges. In an opening salvo that is sure to raise eyebrows, Schneiderman’s office issued detailed “Questionnaires” to thirteen major bitcoin exchanges. These exchanges include, among others, Coinbase, Gemini Trust, and Bitfinex.
Schneiderman’s questionnaires appear to be a first step in the Attorney General’s attempt to gather detailed information from the cryptocurrency exchanges. The questionnaires seek information on the cryptocurrency exchanges’ operations and security protections for consumers. For example, the questionnaire seeks specific ownership information from the exchanges; information regarding fees and transactions; specifics on how the exchanges suspend trading or delay orders; and other information regarding the exchanges’ ability to prevent manipulating the timing of public orders.
“Too often, consumers don’t have the basic facts they need to assess the fairness, integrity, and security of these trading platforms,” Schneiderman said in a statement.
Schneiderman believes that the exchanges have been subject to glitches, robberies and other happenstance. Therefore, Schneiderman believes that transparency and more clarity are required in the space. He claims that the investigation will shed light on what protections the exchanges have established to prevent theft, fraud and suspicious trading. This, Schneiderman believes, will ultimately be a benefit to consumers.
It is not clear whether any exchanges have provided a response to the questionnaires, or if they will respond at all. Fornaro Law will continue to monitor the situation and provide timely updates as they become available.
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