NY DFS Issues Guidance Regarding Fraud in Virtual Currency Markets

2 min

The New York Department of Financial Services (DFS) has released guidance on the prevention of manipulation and fraud in virtual currency markets. Virtual currency business entities have been regulated by DFS since 2015, and six firms currently hold charters or licenses.

Cryptocurrency is a new and quickly changing market, but it's subject to many of the same concerns that regulators apply to traditional markets, including fraud. In its guidance, DFS highlighted some of the fraud risks that are possible with cryptocurrency exchanges. First, customers could abuse an exchange service to manipulate the value of the attached cryptocurrency. Second, an employee of the exchange could trade on the currency using insider information. However, the DFS guidance states that fraud can "take many forms," and calls for robust anti-fraud measures commensurate with the specific risks faced by a given entity.

The guidance requires, as a minimum, licensed firms to have a written policy addressing fraud and related issues. The policy must include:

  • Identification of potential risks;
  • Control mechanisms to mitigate those risks;
  • Allocation of risk-monitoring responsibilities; and
  • Periodic review of those areas.

Additionally, the guidance requires virtual currency entities to implement policies for internal investigation into fraudulent acts.

The above policies segue into the guidance's second set of new requirements––actions licensed entities are expected to take in the event of discovering fraud. DFS requires that firms report the relevant facts upon discovering fraud and update their report with material developments as necessary. The reporting entity must also submit the actions it takes in response to the wrongdoing, as well as any policy changes it intends to make as a result of the event. Here, the guidance provides that it "will be practicable" for an entity to submit the updated information, including new developments and the entity's response, within 48 hours of the initial report.

As the virtual currency market continues to develop, federal and state regulators will continue to respond with new regulatory frameworks, and New York's DFS is on the leading edge. We will continue to monitor cryptocurrency regulation and related issues.