On February 7, 2018, the New York State Department of Financial Services (“DFS”) issued guidance for all virtual currency entities licensed by New York State regarding the prevention of market manipulation, fraud, and other wrongdoing. According to DFS, New York has granted four licenses and two charters to virtual currency businesses to date.
In its guidance, DFS directed virtual currency entities to adopt measures that include, at a minimum, effective implementation of a written policy that:
- Identifies and assesses the full range of fraud-related and similar risk areas, including, as applicable, market manipulation;
- Provides effective procedures and controls to protect against identified risks;
- Allocates responsibility for monitoring risks; and
- As part of its procedures and controls to protect against identified risks, virtual currency entities must provide for the effective investigation of fraud and other wrongdoing, whether suspected or actual, including, as applicable, market manipulation.
The guidance also reminds virtual currency entities that, immediately upon discovery of any fraud or wrongdoing, they must submit a report to notify DFS of the pertinent details known at the time.
Legal and compliance professionals involved in digital or virtual currencies should familiarize themselves with the new guidance and review their written policies to ensure compliance. It is not only the SEC and CFTC that are actively regulating cryptocurrencies and cryptocurrency-related assets – state-level regulators are also getting involved. In addition to the CFTC’s and SEC’s positions on their jurisdiction over virtual currencies as commodities or securities, state regulators are also looking for fraud, market manipulation or other wrongdoing in this area.