The Legislative Move
On April 17, 2018, New York Attorney General Eric T. Schneiderman announced the launch of the Virtual Markets Integrity Initiative, a sweeping fact-finding inquiry into the policies and practices of major cryptocurrency exchanges operating in the state. The initiative sent detailed questionnaires to 13 of the largest crypto trading platforms, marking one of the most significant state-level regulatory actions targeting the digital asset industry to date.
The exchanges receiving letters included some of the most prominent names in the space: Coinbase (GDAX), Gemini Trust Company, bitFlyer USA, Bitfinex (iFinex), Bitstamp USA, Kraken (Payward), Bittrex, Circle/Poloniex, Binance, Tidex, Gate.io, itBit Trust Company, and Huobi Global. The breadth of the inquiry signaled that New York regulators were not singling out any one platform but rather seeking a comprehensive understanding of how the entire exchange ecosystem operated.
Bitcoin was trading at approximately $7,902 on the day of the announcement, with Ethereum at $502.89 and the total cryptocurrency market capitalization hovering around $300 billion. The market had been in a prolonged downturn since January 2018, when Bitcoin had peaked near $20,000 before entering what would become known as the Great Crypto Crash.
Jurisdiction Context
Schneiderman’s office emphasized that the Virtual Markets Integrity Initiative was a fact-finding inquiry, not a formal investigation. No specific wrongdoing had been alleged against any of the targeted exchanges. Instead, the Attorney General’s office sought to understand the baseline operations, fee structures, internal controls, and consumer protections — or lack thereof — across the industry.
The initiative was squarely within Schneiderman’s established pattern of aggressive consumer protection advocacy. His office had previously taken on telecom companies, financial institutions, and pharmaceutical firms. Cryptocurrency exchanges, which had largely operated in a regulatory gray area since Bitcoin’s inception, represented a natural extension of that mandate.
New York had already established itself as a regulatory pioneer in the crypto space with the introduction of the BitLicense in 2015, a controversial framework that required cryptocurrency businesses operating in the state to obtain a specialized license. The Virtual Markets Integrity Initiative built on that foundation, expanding scrutiny from licensed entities to the broader exchange ecosystem.
Industry Reaction
The response from the targeted exchanges was notably measured, even cooperative. Several platforms publicly welcomed the inquiry, framing it as a step toward the kind of regulatory clarity that could legitimize the industry and attract institutional investors. Coinbase, Gemini, and other US-based exchanges had already invested heavily in compliance infrastructure and saw Schneiderman’s initiative as validation of their approach.
However, not everyone was enthusiastic. Some industry observers noted the timing — coinciding with the US tax filing deadline on April 17, 2018 — and questioned whether the announcement was designed to maximize public attention during a period when many crypto traders were already confronting the reality of their tax obligations for the first time. The IRS had classified cryptocurrency as property in 2014, meaning every trade, sale, or conversion was a potentially taxable event.
The questionnaire itself was extensive, covering eight major categories: company ownership structures, fee schedules and disclosure practices, trading procedures and suspension policies, anti-money laundering protocols, risk management mechanisms, internal controls against market manipulation, safeguards against hacking and theft, and customer fund withdrawal procedures.
Compliance Hurdles
The exchanges faced significant compliance challenges in responding to the questionnaire. Many platforms operated across multiple jurisdictions with varying regulatory requirements. Disclosing detailed information about ownership structures, internal controls, and security practices could expose competitive vulnerabilities — or worse, reveal gaps that bad actors could exploit.
For offshore exchanges like Binance and Huobi, the inquiry raised jurisdictional questions. Schneiderman’s authority technically extended only to exchanges serving New York residents, but the decentralized nature of cryptocurrency trading made geographic boundaries increasingly irrelevant. Any platform accessible from a New York IP address could reasonably fall under the Attorney General’s purview.
The initiative also highlighted broader concerns about market manipulation in cryptocurrency markets. Unlike traditional securities exchanges, crypto platforms operated with minimal oversight regarding practices like wash trading, spoofing, and front-running. The questionnaire specifically probed whether exchanges had policies to detect and prevent such activities — a question that many platforms would struggle to answer comprehensively.
What’s Next
The Virtual Markets Integrity Initiative would ultimately produce a 32-page report published in September 2018, finding that cryptocurrency exchanges were “ripe for manipulation” and identifying critical gaps in transparency, fairness, and security across the industry. Several exchanges declined to participate fully in the inquiry, and one — Kraken — publicly pushed back, questioning the Attorney General’s jurisdiction over its operations.
For the crypto industry, Schneiderman’s initiative represented a turning point. It demonstrated that state-level regulators could and would act aggressively to scrutinize cryptocurrency operations, even in the absence of comprehensive federal guidelines. The initiative also set the stage for subsequent regulatory actions, including the New York Department of Financial Services’ ongoing refinement of the BitLicense framework and increased enforcement activity from the SEC and CFTC.
Disclaimer: This article is for informational purposes only and does not constitute financial or legal advice. The regulatory landscape for cryptocurrencies has evolved significantly since 2018. Always consult qualified professionals for current guidance on cryptocurrency regulations and compliance.
Schneiderman sending questionnaires to 13 exchanges including Bitfinex weeks before the Tether cover-up allegations broke. timing wasnt coincidence
BTC at $7902 when this dropped and everyone was already stressed about tax day. NY regulators really knew how to pile on
Bram V. BTC at 7902 with tax day looming and NY drops this. regulators love kicking the market when its already bleeding
the AGs office had been coordinating with the CFTC on that tether investigation since early 2018. the questionnaire wasnt just curiosity, it was evidence gathering for a bigger case
hitting Coinbase, Gemini, Binance, and Kraken all at once was bold. most state AGs would have picked one target and stayed quiet
Tomas R. targeting 13 exchanges at once was a flex. most state regulators pick one fight at a time
Gemini actually welcomed it. the Winklevoss twins had been pushing for regulation since day one. being singled out alongside offshore operators like Bitfinex probably annoyed them
Gemini welcoming regulation while everyone else complained was peak Winklevoss. they bet on compliance as competitive moat from day one
hitting bitfinex weeks before the tether news broke was either brilliant investigative work or someone tipped off the AGs office
hitting Bitfinex first was prescient given what came out about Tether months later. someone at the AG office was doing their homework
Schneiderman sent questionnaires to 13 exchanges and half of them couldnt even answer basic questions about their own order matching. that tells you everything about 2018 exchange standards
Dietrich W. Kraken literally told the AG to pound sand and refused to respond. then came back a year later acting shocked when they got subpoenaed
34 page questionnaire asking for order matching data and conflict of interest policies. most exchanges had never even documented that internally let alone for a regulator
Schneiderman resigned over an unrelated scandal 6 weeks later. the initiative died with him and exchanges went back to doing whatever they wanted for years
bitfinex getting included on that list was inevitable. they were already dodging questions about Tether backing at the same time. the AG office probably knew more than they let on
the questionnaire was 34 pages long. these werent softball questions either, they wanted order matching data, fee structures, conflict of interest policies. most exchanges had never been asked to produce that level of detail
34 pages of questions and most exchanges still didnt change anything. Schneiderman resigned 6 weeks later anyway
Schneiderman sending questionnaires to 13 exchanges in 2018 was ahead of its time. most of those platforms still operate with zero transparency on internal matching engines
13 exchanges got letters and only a handful responded meaningfully. says everything about the state of self-regulation
Marco D. 13 letters and most exchanges sent back boilerplate. Kraken straight up refused and their CEO went on a twitter rant about it. zero consequences
BTC at 7902 and NY drops a regulatory bomb. classic. Schneiderman was actually ahead of the curve on Bitfinex though, Tether imploded months later
comply_watch_ Schneiderman resigned like 6 weeks after sending these. wild how the political timing worked out for the exchanges that just stalled
Schneiderman hitting Bitfinex weeks before the Tether cover-up broke was either incredible instinct or someone on his team was reading crypto twitter way too closely
Gemini welcomed the inquiry while Bitfinex told the AG to get lost. guess which one still has a functioning US business