NYDFS officials are urging banks interested in digital assets take a look at the usefulness of blockchain analytics.
Grygo is the chief content officer for FTF & FTF News.
The New York State Department of Financial Services (NYDFS) is showing new concern about “firms dipping their toes into crypto activities” and, through a new guidance, is urging banks (and other types of firms) to embrace blockchain analytics tools as a way to mitigate risk and achieve regulatory compliance.
A guidance “is not intended to limit the scope or applicability of any law or regulation,” NYDFS notes. However, it holds a lot of weight, especially as the SEC and CFTC are exploring new rules and regulations for cryptocurrencies and other digital assets.
“As traditional banking institutions expand into virtual currencies amid an increasingly favorable regulatory environment, the New York state watchdog has issued guidance making it clear that firms are expected to consider incorporating blockchain analytics as an additional risk-management tool,” according to the announcement on September 17. “Such tools could be useful for assessing risk exposure through customer wallet screening and funds verification; holistic monitoring for illicit activity; and weighing the risks associated with crypto products and services,” the NYDFS notes.
To recap, NYSDFS officials issued guidance on April 28, 2022, for “all virtual currency business entities,” and have basically expanded it because the situation has evolved since then. For now, NYDFS officials are asking covered institutions to consider “the utility of blockchain analytics tools” and they provide the following examples:
- Screening the wallets of customers who have disclosed or exhibited crypto-related transactions to assess risk exposure;
- Verifying the source of incoming funds originating from virtual asset service providers (VASPs);
- Monitoring the crypto ecosystem holistically, to assess customer (e.g., VASP) exposure to money laundering, sanctions violations, or other predicate crimes;
- Identifying and gauging the risk of third parties (such as VASP counterparties) with which a customer has engaged;
- Evaluating expected versus actual activity (such as dollar thresholds) of customers engaging in virtual currency activity;
- Utilizing intelligence gained from holistic monitoring to further develop the Covered Institution’s risk assessments and risk appetite;
- Weighing the risks associated with a virtual currency product or service to be offered.
“Covered institutions are advised that this list of examples is not exhaustive; there may be additional instances or considerations that may weigh in favor of blockchain analytics as a useful risk-identification and risk-mitigation tool, and all controls are expected to be tailored to a Covered Institution’s business model, risk appetite, and operations, as appropriate,” according to the guidance.
“It is important to re-assess risk-management frameworks regularly, including in light of changing business models, new customer types, and new market entrants. Emerging technologies introduce new and evolving threats that require new tools, such as blockchain analytics, with enhanced capabilities to aid risk identification and mitigation,” the regulator notes. “With increasing virtual currency adoption, Covered Institutions play a critical role in safeguarding the integrity of the financial ecosystem to prevent illicit activities like money laundering, terrorist financing, and sanctions evasion.”
“As traditional banking institutions expand into virtual currency activities, their compliance functions must adapt, onboarding new tools and technologies to mitigate new and different risks,” says Adrienne A. Harris, superintendent for the NYDFS, in a prepared statement.
The full text of the guidance can be found here: https://shorturl.at/7kQWM
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