This past April, the New York State Attorney General’s office (“NYAG”) contacted several virtual currency platforms requesting information on a number of their practices. In September, the NYAG issued a public report based on the results of these findings.Here at LGO, we have had the opportunity to review this report and will describe some of the processes and policies we have implemented to mitigate the highlighted issues.
The Virtual Markets Integrity Report (the “Report”) addresses areas of particular concern and highlights key policies and practices of the responding platforms. The Report includes the following sections:
Section I: Jurisdiction, Acceptance of Currencies, and Fees. How customers sign up with trading platforms; access controls in place; acceptance of fiat currency (i.e., traditional, government-issued currency), and fee structures.
Section II: Trading Policies And Market Fairness. Addresses the trading rules in place at the platforms and fairness for retail investors. Discussion of order types, the availability of credit (margin trading), policies on automated or algorithmic trading, and measures taken (if any) to address market manipulation and other abusive trading practices.
Section III: Managing Conflicts of Interest. Addresses potential conflicts that may arise between the interests of virtual asset trading platforms, their employees, and their customers.
Section IV: Security, Insurance, And Protecting Consumer Funds.Covers the use of independent auditing by the trading platforms, their independent security testing, and their safeguarding of customer funds through insurance and other means.
Section V: Access to Customer Funds, Suspensions, and Outages.Discusses issues concerning customer transactions and withdrawals, policies for suspending trading activity, including customer notification in the event of outages or scheduled maintenance.
The Report revealed three broad areas of concern for the virtual markets as a whole:
1. Various Business Lines & Operational Roles of Trading Platforms Create Potential Conflicts of InterestVirtual asset trading platforms often engage in several lines of business that would be restricted or carefully monitored in a traditional trading environment (Exchange Services, Proprietary Trading, Money Transmission, Market Making).
2. Trading Platforms Have Yet to Implement Serious Efforts to Impede Abusive Trading ActivitySome virtual currency platforms have taken steps to monitor trading and safeguard the integrity of their exchange.Platforms lack robust real-time and historical market surveillance capabilities found in traditional trading venues.There is no mechanism for analyzing suspicious trading across multiple platforms.Those factors, coupled with the concentration of virtual currency in the hands of a relatively small number of major traders, leave platforms highly susceptible to abuse.
3. Protections For Customer Funds Are Often Limited or IllusoryGenerally accepted methods for auditing virtual assets do not exist- lack of a consistent and transparent approach.Several, claim there is no independent auditing of their virtual currency holdings.Customers are highly exposed in the event of a hack or unauthorized withdrawal.While domestic or foreign deposit insurance may compensate customers for certain losses of stolen or misappropriated fiat currency, no similar compensation is available for virtual currency losses.
The LGO Solution
LGO Markets (“the Firm”) is creating a trading platform for institutional investors that will be fair, secure and transparent. While a number of institutions are currently trading these types of assets, there are many more waiting for solutions like ours before entering this market.
1. How does LGO prevent conflicts of interest?Proprietary Trading/Market Making: At LGO, we don’t engage in proprietary trading or market making. All trading activity is verifiable and our platform is provably fair. Our only focus is on providing the highest quality of execution for our clients.Custodian: We do NOT hold funds on behalf of our clients. All funds are held with an independent custodian under the client’s name. This is incredibly important from a perspective of market integrity.Employees: It’s important to note that all of our employees work SOLELY for LGO. We don’t allow anyone to work in any capacity for any other company.
2. What will LGO do to monitor abusive trading activity on its platform?Robust Onboarding Process: At LGO, we believe that you can mitigate abusive trading activity by having the right clients on your platform. Our sales team vets all prospective institutions and refers them to our Compliance Department. Through our Onboarding Process, every institution and trader will be required to successfully complete reviews for Anti-Money Laundering (“AML”) and Know Your Customer (“KYC”) verifications. The Firm has partnered with third-party vendors who are experienced in this industry.Dedicated Staff to review trading activity: LGO has dedicated staff monitoring our trading platform. We have years of experience with electronic trading and know which types of activities are legitimate and which are manipulative.Transaction Monitoring: In addition to monitoring trade activity, we will also monitor all transactions (both deposits and withdrawals) to the hardware wallets. We are partnering with an experienced third-party vendor to review the source of our clients’ funds. Any suspicious activity will be subject to review, including notification to the proper authorities.Risk Controls and Exception Reports: We are working with our technology team to create various risk controls and exception reports which will identify abusive trading practices.Discussions with Third Party Vendors: LGO is having conversations with various companies in this space. The goal is to find potential partners with innovative solutions and continue to differentiate ourselves from other platforms.
3. How will LGO protect its customers’ funds and assets?Use of Independent Custodian: As mentioned earlier, LGO will not act as a custodian under any circumstances. The Firm is partnering with various qualified third-party custodians where our institutional customers will hold independent accounts.Hardware Wallet with Multiple Signatures: All assets will be held in a secure wallet that is owned by the client. LGO will monitor every transaction (both deposits and withdrawals) to verify the source of funds. Any suspicious activity will be flagged for further review and if necessary, reported to the proper authorities. Once the source is verified, a minimum of two signatures (between the Client, Custodian, LGO) will be required to release the assets from this wallet.Insurance: Even though LGO will not act as a custodian, we believe it is critical to provide multiple layers of protection. The Firm is currently working with a well-known insurance company to secure a policy that will safeguard all assets being traded on our platform.
4. What additional controls and safeguards will LGO implement?Fee Disclosure: In line with our core values, LGO has been and will continue to be completely transparent regarding our fee structure for clients.Independent Audits: We are planning to hire Third Party companies for reviews which include, but are not limited to: Audited Financial Statements, Penetration Tests, Vulnerability Scans, Firm Wide Training in Cybersecurity.Creation and Publication of Listing Standards: As we explore additional offerings on our trading platform, we will create and make publicly available the standards used to determine which assets will be listed.
At LGO, we are working hard to create a platform which will solve for a number of issues that are currently prevalent within this industry. We believe that providing a fair, secure and transparent trading platform will not only attract new clients but restore confidence for many existing ones.