New York state of mind: a look at NY Department of Financial Services' role as one of the most active regulators in the crypto space
Over the last few years, the New York Department of Financial Services (DFS) has been one of the most active regulators globally in the cryptocurrency space.
In June of 2015, DFS issued virtual currency regulation 23 NYCRR Part 200 under the New York Financial Services Law. Since then under that “BitLicense” regulation DFS has granted virtual currency licenses and charters to 33 crypto-related businesses seeking to operate in New York State.
To get a BitLicense a firm must go through a 44-page regulatory checklist that goes through capital requirements, anti-money laundering programs, cybersecurity infrastructure, business models, description of services, corporate governance, disclosure of risks, and maintenance of records. License holders must submit to regular examinations and alert DFS in case of fraud, data breach or hack.
In addition to the BitLicense regime, which has been clarified, steamlined, and offered a conditional license, over the years, DFS has produced myriad guidance to licensed entities or those seeking a license.
For example, in January 2023, DFS released regulatory guidance to protect consumers in the event of a virtual currency insolvency. The guidance applies to those entities the DFS has licensed or chartered to custody, or temporarily hold virtual currency assets on behalf of their customers. The guidance, the wake of the collapse of FTX, required entities to protect customer assets; maintain comprehensive records; properly disclose the material terms and conditions on products and services, including custody services; and refrain from making any false, misleading or deceptive statements.
In December 2022, DFS issued guidance to banks that wish to engage in cryptocurrency-related activities which required that covered institutions seek approval prior to offering virtual currency related products and services. This guidance presented one of the clearest paths globally for banks to offer cryptocurrency services by instructing financial institutions to to submit a business plan with details of the proposed activity, detail how such a service would impact the bank's capital and liquidity and inform NYDFS of its plans at least 90 days beforehand.
Similarly, in June 2022, in the wake of collapse of stablecoin Terra, DFS issued clear guidance for stablecoin issuers regulated in NY, requiring a stablecoin to be fully backed by a reserve of segregated assets and in April 2022, the New York regulator issued clear guidance to all licensed cryptocurrency businesses on the use of blockchain intelligence such as TRM, emphasizing the importance of blockchain analytics to ensure “effective policies, processes, and procedures, including, for example, those relating to customer due diligence, transaction monitoring, and sanctions screening.”
DFS has also issued guidance on Ethereum’s protocol change, on listing certain virtual currencies, and a framework for a conditional Bitlicense. Over the last year, we have seen regulators and policy makers across the globe — from Dubai to Singapore, Europe to Australia, Japan, Canada, Brazil and beyond — work on comprehensive frameworks for digital assets. In the United States we have seen continued enforcement actions by financial regulators resulting in myriad court cases and legislative paralysis. In the midst of fragmentation, NY DFS has bucked this trend by building, over time, an increasingly comprehensive framework.
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