Over recent months, numerous state regulators, including in Massachusetts, Texas, and New Jersey, have been exercising greater oversight of cryptocurrency businesses. On April 17, 2018, the office of the New York Attorney General Eric Schneiderman (“NYAG”) launched the Virtual Markets Integrity Initiative, which will seek information from various platforms that trade cryptocurrencies to better protect consumers. The initiative responds to concerns that cryptocurrency trading platforms may not provide consumers with the same information available from traditional exchanges. As part of the initiative, the NYAG’s Investor Protection Bureau sent thirteen major cryptocurrency trading platforms questionnaires relating to internal policies, controls, and best practices. The Bureau intends to consolidate and disseminate to consumers the information it receives.
The questionnaires seek categories of information broadly relevant to consumers of regulated financial products, including each platform’s policies and procedures with respect to automated trading, audits, and market outages or suspensions. They also include questions regarding measures each platform has taken to address issues affecting the fairness and integrity of the cryptocurrency market, such as money laundering, privacy, market manipulation, and theft of consumer funds. The NYAG has requested that responses be provided by May 1, 2018.
New York lawmakers previously sought to address potential concerns regarding the virtual currency markets by enacting legislation in 2015 that requires a “BitLicense” for any virtual currency business activity located in New York or involving New York residents. The prerequisites for obtaining a BitLicense are robust, including enforcement of compliance policies, minimum capital requirements, and a surety bond or trust account for the benefit of customers. In addition, entities that acquire a BitLicense are subject to change of control restrictions, examinations by the superintendent, and advertising limitations. Some lawmakers, however, have more recently expressed interest in amending the licensing requirements based on concerns raised by industry participants, including that the requirements may encourage start-ups and small technology firms to flee the state.
In contrast to the prior legislative efforts, the NYAG’s newly formed Virtual Markets Integrity Initiative appears to be an effort to establish a dialogue with cryptocurrency platforms in the evolving virtual market. Multiple cryptocurrency trading platforms have already expressed their willingness to cooperate and comply with efforts to increase transparency and accountability, as increased consumer confidence may support their long-term growth. However, one trading platform, which left New York in 2015 following legislation on the BitLicense, declined to answer, asking the NYAG to focus on platforms actually operating in New York. While it is unclear how the NYAG will assess the sufficiency of the information it does receive, such information will be valuable as states and federal regulators continue efforts to institute a framework that safeguards consumers without stymieing innovation.
 The Texas Securities Commissioner has entered more cease-and-desist orders to cryptocurrency exchanges than any other state regulator, including, on January 4, 2018, an emergency cease-and-desist order to halt the investment programs operated by BitConnect because it was not registered to sell securities in Texas. More recently, on March 7, 2018, the New Jersey Bureau of Securities sent a cease-and-desist order to Bitcoiin (not to be confused with Bitcoin), ordering the company to stop offering for sale any security in New Jersey until it is properly registered.