New York’s financial regulator is encouraging banks exploring digital assets to consider the benefits of using blockchain analysis tools.
Grygo is the chief content officer for FTF & FTF News.
The New York State Department of Financial Services (NYDFS) is placing renewed emphasis on institutions venturing into cryptocurrency activities. New guidance highlights the usefulness of blockchain analytics for banks and other financial entities to manage risks and ensure they are following all regulations.
The NYDFS clarifies that this guidance isn’t meant to change the scope of any existing laws or rules. However, it carries considerable weight, especially while the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) are developing new rules for digital assets and cryptocurrencies.
According to a September 17th announcement, the New York regulator believes firms should think about adding blockchain analytics as another way to manage risk as traditional banks expand into virtual currencies, with a regulatory landscape growing in favor of digital assets. The NYDFS says that these technologies can assist in assessing risk by checking customer wallets and confirming funds, providing overall monitoring for illegal activities, and assessing the risks related to various crypto services and products.
To summarize, the NYDFS issued guidelines on April 28, 2022, aimed at all virtual currency businesses and the state is broadening its focus as the field has evolved. Currently, NYDFS representatives are advising that relevant institutions evaluate the value of blockchain analytics tools, and offer the following as potential use cases:
- Evaluating risk by scrutinizing customer wallets where crypto activity has been reported or identified.
- Confirming the origins of funds arriving from Virtual Asset Service Providers (VASPs).
- Conducting comprehensive monitoring of the cryptocurrency space to evaluate risks faced by customers (such as VASPs) regarding money laundering, violations of sanctions, or other illegal actions.
- Determining and evaluating the risks connected to third parties (like VASP counterparties) engaging with a customer.
- Comparing anticipated activity against actual behavior (for example, dollar value thresholds) of customers participating in cryptocurrency activities.
- Leveraging insights gained from thorough monitoring to enhance a Covered Institution’s risk assessments and tolerance.
- Analyzing the potential risks associated with providing a virtual currency product or service.
The agency notes, “Covered institutions should know this is not a complete list; more examples or considerations could highlight blockchain analytics as a helpful way to find and lessen risk. All controls should also fit the Covered Institution’s business model, risk tolerance, and way it operates.”
The regulator explains that regularly reviewing risk-management procedures is important, especially with changing business strategies, new categories of customers, and the entry of new market participants. Innovative technologies present new and changing threats that need new tools, such as more advanced blockchain analytics, to help find and reduce risk. With the growing use of virtual currencies, Covered Institutions are essential to maintaining the integrity of the financial system to stop illegal activities such as money laundering, funding for terrorism, and avoiding sanctions.
Adrienne A. Harris, the superintendent for the NYDFS, stated that as traditional banks increase their involvement in virtual currency activities, their compliance practices must evolve by implementing modern tools and technologies to mitigate new and different risks.
The complete text of the guidance is available here: https://shorturl.at/7kQWM