On February 7, 2018, the New York State Department of Financial Services (“DFS”) issued “Guidance on Prevention of Market Manipulation and Other Wrongful Activity”. The guidance was issued to all virtual currency business entities licensed under 23 NYSCC Part 200, or chartered as limited purpose trust companies under New York’s Banking Law. The purpose of the guidance was to address the “ongoing development of virtual currency-related markets.”
The guidance requires VC entities to create measures to detect and prevent fraud, particularly market manipulation. The guidance requires, at minimum, implementation of written policies to: (1) identify and assess the “full range of fraud-related and similar risk areas”, including market manipulation; (2) provide for “effective procedures and controls” to protect against risks that have been identified; (3) determine how the responsibility for monitoring risks are allocated; and (4) periodic evaluation and revisions of the procedures to “ensure continuing effectiveness”, as well as compliance with all laws and regulations that apply.
A VC entity must also implement procedures and control to effectively investigate fraud and other wrongdoing. And, as soon as any wrongdoing is discovered, the VC entity must submit a report to the DFS detailing the wrongdoing, a statement of the actions taken, and a statement of the steps being taken to prevent the wrongdoing from happening again. The VC entity must keep records of each incident of wrongdoing, to be inspected by the DFS.
A link to the NYS DFS guidance can be found at: http://www.dfs.ny.gov/legal/industry/il180207.pdf