On February 7, 2018, the New York State Department of Financial Services (“DFS”) issued guidance for all virtual currency business entities (“VCBEs”) regarding the prevention of market manipulation and other wrongful activity. In a brief, two-page document, the DFS: (1) emphasized the importance of effectively preventing and responding to fraud and similar wrongdoing; (2) stated that effective measures must include implementation of a written policy to, among other things, identify and effectively prevent risks; and (3) required VCBEs to provide reports to DFS immediately upon the discovery of “any wrongdoing”.
DFS directed each VCBE to take effective measures to detect, prevent, and respond to fraud or market manipulation. At a minimum, DFS expects such measures to include the 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
- provides for periodic evaluation and revision of the procedures, controls and monitoring mechanisms in order to ensure continuing effectiveness, including continuing compliance with all applicable laws and regulations.
DFS also directed each VCBE to provide for the “effective investigation” of fraud or other wrongdoing as part of its procedures and controls.
Should a VCBE discover any wrongdoing, it must immediately submit a report to DFS “stating all pertinent details known” and, thereafter and as soon as practicable, submit further reports regarding any material developments. The expectation of DFS is that in most cases, it should be feasible for a VCBE to submit such a follow-on report within 48 hours after the original report of wrongdoing. DFS also stated that VCBEs must maintain records of each incident of wrongdoing.
DFS’s guidance applies to any entity that has a license under 23 NYCRR Part 200 or that is chartered as a limited purpose trust company under the New York Banking Law.” According to DFS, DFS has granted four licenses and two charters to date.