Three of the cryptocurrency exchanges that help power CME Group Inc.’s Bitcoin futures market have raised red flags with New York state regulators, with the state’s chief legal officer accusing them of operating illegally, Bloomberg reported on September 18.
CME’s Crypto Partners Get Called out by New York Regulators
In a September 18 report, Attorney General Barbara Underwood said her office referred Binance, Kraken, and Gate.io to the New York Department of Financial Services for possible violation of digital-currency regulations.
According to a September 18 Bloomberg report, the refusal to provide the state with previously requested information raised red flags in the Attorney General’s office, prompting them to suspect that the exchanges were involved in market manipulation.
The Attorney General’s report also listed Kraken as an exchange of concern, citing its refusal to participate in the attorney general’s review. Kraken Chief Executive Officer Jesse Powell dismissed the office’s request in an April 18 tweet.
The exchange, which CoinMarketCap ranked as the 14th biggest the world by trade volume, has reportedly made “alarming” public comments about abusive trading.
New York Attorney General Barbara Underwood stated that that comments made by the company’s executives, including those that manipulation “doesn’t matter to most crypto traders” even though “scams are rampant,” were enough to indicate that that CME’s futures are based on a price that’s being batted around by cheaters.
Prop Trading the Main “Area of Concern”
The Attorney General’s report found three different “areas of concern” within the crypto market and has specifically flagged the lack of protection from abusive trading practices as the market’s main problem.
“Virtual asset trading platforms have yet to implement serious efforts to monitor and stop abusive or manipulative trading,” Underwood said. “Few platforms seriously restrict, or even monitor, the operation of ‘bots’ or automated algorithmic trading on their venue.”
Underwood also noted that many of these exchanges engage in proprietary trading, meaning that they trade on their own platforms on behalf of themselves.
However, Bloomberg explained that prop trading isn’t a problem per se, as many bank-owned dark pools and other private markets often legally trade stocks directly with clients. The report cited San Francisco-based Coinbase Inc.’s marketplace as an example, as nearly 20 percent of its executed volume came from its own trading.
What regulators seem to have a problem with is the lack of transparency, as many customers aren’t aware of these practices.
“As a general principle, when a significant percentage of the volume in one or more assets on a venue is attributable to one source, customers face the risk that the availability of liquidity in those assets could change, without notice and at any time,” Underwood explained in the report.
However, neither Coinbase nor any of the other exchanges mentioned in the report are directly regulated by the SEC, which raises questions about how the Attorney General plans on tackling this issue.
Featured image by Evelin Serritos