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State report: Cryptocurrency exchanges have alarmingly low customer protection

In a recently released report, the New York State OAG highlights the results of an investigation into cryptocurrency trading platforms, and the results are not flattering to the exchanges.

The New York State Office of Attorney General (OAG) has released a report suggesting that cryptocurrency exchanges are susceptible to manipulation.

The report shows the results of an investigation – the “Virtual Markets Integrity Initiative” – launched in April. It highlights areas which show particularly concerning vulnerabilities. This is regarding the “transparency, fairness, and security of virtual asset trading platforms”. The report also explores the key policies and practices of the digital trading platforms investigated.

The results come from investigations orchestrated by Eric T. Schneiderman, New York Attorney General. Schneiderman had sent probing inquiries letters to thirteen cryptocurrency exchanges. The inquiries were requesting aspects of their operations, internal controls, and other fundamental areas.

The released report use ten of the responding exchanges to compile the results. These were laid out under five key sections:

  • Jurisdiction, Acceptance of Currencies, and Fees
  • Trading Policies And Market Fairness
  • Managing Conflicts of Interest
  • Security, Insurance, And Protecting Consumer Funds
  • Access to Customer Funds, Suspensions, and Outages

The investigation outlines the issues found in cryptocurrency trading. This pertains to a lack of common auditing practices. The OAG finds this “troubling, given the amounts of customer money (fiat and virtual) held by these platforms“. This gives room for customer vulnerability and amounts to risk from being attacked by hackers.

The report explains that there are risks of price manipulation owing to automatic trading policies, or “bot trading strategies“:

“Certain abusive trading practices can be accomplished using computer-automated or “bot” trading strategies. For example, the submission of multiple, illusory orders to a trading platform could be used to artificially move the price of a particular asset, or to negatively impact the speed or responsiveness of the platform.”

The report further outlined security matters. The problem highlighted suggests that the platforms cannot attempt to put strategies of protection in place if it does not know what to protect against:

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.”