Topic: Prevent Market Manipulation By Virtual Currency Exchanges (Read 506 times)

Dear Mr. Lawsky,

Thank you for your time today, and for your efforts to enact reasonable regulation on virtual currency exchanges in New York. As an avid and active speculator in those markets, as well as a long time virtual coin enthusiast, I sincerely appreciate the work you are doing to protect individuals like myself, and I hope that the New York Department of Financial Services is able enact your proposals sooner rather than later.

An important issue that I would like to bring up and which I have not read about or heard in any of your comments, is the need to protect consumers from market manipulation by the exchanges themselves. Please allow me to outline a scenario that I believe occurs on a daily basis, and which I would like you to consider:

1) A virtual currency exchange provides a trading platform for its customers, and receives fees in the form of the virtual currency coins for clearing the trades.

2) The exchange is now a holder of the virtual currency from the trading fees. The amount of virtual currency that the exchange possesses rises rapidly, as every day they accumulate more fees, and more coins.

3) The exchange uses those coins to drive market direction either up or down, and often both, by placing manipulative orders to effect price changes, cause more volatility and ultimately, more fees for themselves, and/or a higher selling price for their own coins.

4) Because the exchanges are often among the largest holders of the coins it easy for them to create large enough orders to drive market direction.

5) Lastly, it is also possible for the exchanges to ‘cook the books’ and provide false orders in the system to create volatility and additional trading fees, or to inflate the price of coins they hold while they dump them on the unsuspecting public.

Mr. Lawsky, as you can see, there is a clear conflict of interest between exchanges receiving fees in the form of the virtual currencies, and their ability to trade those same coins on their own exchanges. This is something that is detrimental to consumers and to potential investors in this newly emerging arena.

Here is an idea I would like to propose to you and again I appreciate your consideration:

1) Virtual currency exchanges must disclose on a daily basis any coins they have sold on their own exchange, and the corresponding price of the sale.

2) This should be included in a routine and regular audit of the exchanges to ensure that the coins they receive from fees are all accounted for and documented, either as holdings, or as sold.

3) To protect consumers from price manipulation, and because it’s such a conflict of interest to allow the exchanges themselves to potentially be market makers on their own exchange, I do not think it would be unreasonable to consider barring the exchanges from selling any coins they’ve earned in fees on their own exchange.  To be more clear in case that language was confusing, they should potentially not be able trade coins on their exchange for their own gains.

Mr. Lawsky, I welcome your comments on the matter and would love the chance to clarify any details, should you have questions regarding the above examples.
Again, I appreciate your work, time and thoughtful consideration of virtual coin regulation.
Thank you, and have a great day.