Regulators in New York Taking Aim at Crypto Firms That Mishandle Customer Funds: Report

January 23, 2023 The Daily Hodl

NYDFS Releases Guidance on Importance of Segregation and Separate Accounting for Customer Funds in Crypto Industry

January 23, 2023 Bitcoin.com

NYDFS advises crypto firms not to commingle user and corporate funds in the event of insolvency

January 23, 2023 Coin Telegraph

Bankruptcy

“A VCE's customer agreement should make clear the parties’ intentions to enter into a custodial relationship, rather than a debtor-creditor relationship," said the NYDFS.

The New York Department of Financial Services, or NYDFS, has released guidelines on how licensed crypto firms should handle customer assets should they face “insolvency or similar proceeding”.

In a Jan. 23 announcement, NYDFS superintendent Adrienne Harris said crypto firms and exchanges operating under a BitLicense — required in New York state — should segregate corporate funds from users’ virtual currency holdings both on-chain and in the “internal ledger accounts” of the company’s custodian. According to the regulator, crypto firms are expected to hold users’ assets “only for the limited purpose of carrying out custody and safekeeping services”:

“A [virtual currency entity’s] customer agreement should make clear the parties’ intentions to enter into a custodial relationship, rather than a debtor-creditor relationship.”

In addition to these guidelines, NYDFS added that all licensed firms custodying assets should “maintain appropriate books and records” as well as disclose information related to its products and services in terms and conditions available to customers. Harris said the guidance was aimed at the “safekeeping of customer assets”.

#ICYMI: Superintendent Adrienne A. Harris released Regulatory Guidance to better protect customers in the event of an insolvency or similar proceeding. Read more here: https://t.co/Nstz39M9Wo pic.twitter.com/FJ0fbrJBxH
— NYDFS (@NYDFS) January 23, 2023

The announcement followed several crypto exchanges based in the United States filing for Chapter 11 bankruptcy protection after some reported liquidity issues, including FTX, BlockFi, Voyager Digital, and Genesis. Many former customers of the crypto firms have not been made whole amid bankruptcy proceedings.

Harris said during a November 2022 speech that lawmakers at the federal level should consider a “framework nationally that looks like what New York has” in terms of crypto regulation, referring to the state’s BitLicense regime. The NYDFS has also previously released regulatory guidance for U.S. dollar-backed stablecoins.

Coinbase Agrees to $100 Million Settlement With New York Financial Regulator for Anti-Money Laundering Violations

January 4, 2023 Bitcoin.com

Coinbase Settles for $100M With Regulators Over Compliance System

January 4, 2023 The Crypto Briefing

New York State issues guidance for banks seeking to engage in activities with crypto

December 15, 2022 Coin Telegraph

Banks

The state, a notoriously demanding regulator of the industry, has released detailed guidelines for banks’ applications; some licensed banks may have to play catchup.

The New York state Department of Financial Services (DFS) released guidance on Dec. 15 for regulated banks seeking to engage in activities with virtual currency. The guidance, which took effect immediately, describes the application process and “summarizes the types of information the Department considers relevant” for obtaining the agency’s approval.

The 11-page document consisted largely of bullet points as it described the informational requirements for several categories, such as “Business Plan” and “Consumer Protection,” in detail, followed by a series of formal checklists.

Approval is required 90 days before engaging in activities, the document reminded. Approval for prior activities “does not constitute general consent” for other activities, and some activities by third-party service providers may require the agency’s approval as well.

As much as it pains me to admit this, the @NYDFS Bitlicense accomplishes many of these goals; and the DFS is working closely w/ other regulators like the UK. https://t.co/q2zEJfZ3qT pic.twitter.com/8CxSX2UZ91
— matthew sigel, recovering CFA (@matthew_sigel) December 14, 2022

Furthermore, institutions that are already engaged in virtual currency activities were instructed in the statement accompanying the guidance to check in with their points of contact at the agency immediately.

DFS superintendent Adrienne A. Harris said in a statement on the new guidance:

“It is critical that regulators communicate in a timely, transparent manner about the evolution of our regulatory approach.”

New York is known as a tough regulator of crypto businesses, and has come under criticism from New York City Mayor Eric Adams and many others for stifling economic innovation and growth. Harris has defended the state’s approach vigorously. In light of this, detailed guidance may be highly valuable for regulated institutions.

New York was one of the first states to license virtual currency activities when it introduced its so-called BitLicense in 2014. It also claimed to be the first state to impose strict requirements for stablecoin reserves and redeemability in June. In December, the state proposed adding an annual assessment fee for licensed crypto firms under new powers granted to the agency in April.

New York financial regulator fines Robinhood’s crypto division $30M

August 2, 2022 Coin Telegraph

<div>New York financial regulator fines Robinhood's crypto division M</div>

AML

“As its business grew, Robinhood Crypto failed to invest the proper resources and attention to develop and maintain a culture of compliance,” said superintendent Adrienne Harris.

The New York Department of Financial Services, or NYDFS, has announced a $30 million penalty on Robinhood’s cryptocurrency arm for alleged violations related to anti-money laundering, cybersecurity and consumer protection laws.

In a Tuesday announcement, NYDFS superintendent Adrienne Harris said Robinhood Crypto will pay a $30 million penalty to the state “for significant failures in the areas of bank secrecy act/anti-money laundering obligations” as well as cybersecurity failures that allegedly violated New York regulations. According to Harris, Robinhood’s crypto unit will also be required to hire an independent consultant to evaluate the firm’s compliance and remediation efforts.

“As its business grew, Robinhood Crypto failed to invest the proper resources and attention to develop and maintain a culture of compliance,” said Harris. “All virtual currency companies licensed in New York State are subject to the same anti-money laundering, consumer protection, and cybersecurity regulations as traditional financial services companies.”

#ICYMI: DFS Superintendent Harris Announces $30 Million Penalty on Robinhood Crypto for Significant Anti- Money Laundering, Cybersecurity & Consumer Protection Violations. Read more: https://t.co/TUD2SwmOcw
— NYDFS (@NYDFS) August 2, 2022

According to the NYDFS’s consent order, the department conducted an examination of Robinhood Crypto between January and September 2019, alleging that it had “found serious deficiencies in RHC’s compliance function across multiple areas.” The NYDFS then began an enforcement investigation, finding that Robinhood’s crypto arm violated aspects of the Bank Secrecy Act, or BSA, and Anti-Money Laundering, or AML, regulations.

Among these violations were allegations Robinhood Crypto did not transition to an adequately sized transaction monitoring system o “devote sufficient resources to adequately address risks.” In addition, the financial regulator alleged Robinhood failed “to maintain on its website a telephone number for the receipt of customer complaints” as part of a supervisory agreement.

In a statement to Cointelegraph, Robinhood associate general counsel of litigation and regulatory enforcement Cheryl Crumpton said the firm had reached a settlement in principle with the NYDFS in 2021 and disclosed the matter in its public filings. According to Crumpton, Robinhood made "significant progress building industry-leading legal, compliance, and cybersecurity programs."

In June 2021, the U.S. Financial Industry Regulatory Authority penalized Robinhood for roughly $70 million for allegedly causing “widespread and significant harm” to thousands of users and exhibiting “systemic supervisory failures” starting as early as September 2016. At the time of publication, shares of HOOD were trading at $9, having fallen roughly 0.3% in the last 24 hours.

Robinhood Crypto Handed $30M Fine by New York Regulator: WSJ

August 2, 2022 The Crypto Briefing

NYDFS calls for crypto firms to use blockchain analytics

April 28, 2022 Coin Telegraph

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The regulatory agency asked crypto firms to adopt methods to ensure greater risk assessment for potentially problematic transactions.

In a letter published on Thursday, the New York State Department of Financial Services, or NYDFS, recommended that all virtual currency companies operating under New York banking law adopt blockchain analytics to trace transactions. In supporting the decision, the regulatory agency wrote:

"Wallet addresses are typically pseudonymous, with nothing on the face of the transfer tying back to the originator, beneficiary, or underlying beneficial owners."

Therefore, as told by NYDFS, it is vital that such class of firms use blockchain analytics to prevent illicit transactions, such as money laundering or terrorism financing. The agency also outlined three analytical processes that can help combat such measures. These include augmenting Know Your Customer, or KYC, related controls, conducting transaction monitoring of on-chain activity, and conducting sanctions screening of on-chain activity.

Separately, the same day, cryptocurrency exchange Coinbase announced that it was rolling out a novel know-your-transaction, or KYT, service, dubbed "Coinbase Intelligence," to help cryptocurrency firms deal with compliance issues. As told by Coinbase, it is an API-type service that businesses and institutions can use to mitigate regulatory risks on their own platforms. Features include:

Automating real-time transaction monitoring for millions of transactions by generating risk scores for addresses.
Receiving alerts to enable proactive risk management if there are changes to risk profiles.
Easily configuring rule engines and unique risk insights into existing third-party case management tools.
Screening transactions for anti-terror financing and other AML-related flags at scale.

Meanwhile, Coinbase Analytics has been rebranded to Coinbase Tracer to visualize the flow of funds using public attribution data to reduce fraud, demystify counterparty risk, and help flag anti-money laundering risks with risk scores and alerts.

BitLicensed Crypto Firms Ordered to Pay Annual Assessment Fees in New York

April 19, 2022 Coin Telegraph

assessment fees

The fees will bring virtual currency companies on par with those paid by banking and insurance institutions as a way for the state to recoup operating expense costs and “best support” the industry.

The cost of running a crypto business in New York is about to rise with the state government gearing up to require companies holding a BitLicense to pay assessment fees to ensure they’re complying with regulations.

The rule was included in New York State’s FY2023 budget signed into law on April 9th by Governor Kathy Hochul giving the state's Department Of Financial Services (DFS) a “new authority to collect supervisory costs from licensed virtual currency businesses,” according to a statement by the DFS.

DFS Superintendent Adrienne Harris said the fees would bring virtual currency businesses in line with those already paid by institutions such as banking and insurance companies and added:

“New York was the first to start licensing and supervising virtual currency companies, and we continue to attract more licensees and the most crypto startup funding of any state in the nation.”

The state of New York was the first in the U.S. to require crypto companies to be licensed with the introduction of the now known “BitLicense”, the application fees for such a permit are currently $5,000 and are subject to vague capital requirements determined by the New York DFS.

The annual assessment fee amount that the DFS will charge crypto firms is currently unknown, but the same fees for other regulated financial institutions can cost tens of thousands of dollars a year.

The DFS states the fees are to assist with paying the operating expenses of regulating crypto firms and “will empower the Department to build staff with the capacity and expertise to best regulate and support this rapidly growing industry.”

Businesses that accept crypto as payment, create software for the crypto space such as self-custody wallets, or give advice on crypto trading aren’t subject to the BitLicense and corresponding new fees.

Recently, the regulation and licensing of crypto in the state have come under fire with billionaire investor Bill Ackman sharing his thoughts in February about New York’s failing policies and how it could make him leave the state.

Ackman appealed to Mayor Eric Adams and Governor Hochul to address the increasing concerns around regulation, saying that easing restrictions and removing regulatory barriers could make New York a “crypto center of innovation.”

Mayor Adams ran with plans to make New York City the “center of the cryptocurrency industry” even taking his first three paychecks in Bitcoin (BTC). Analysis from Cointelegraph in November shows that it’s really up to the New York DFS and state government to enact changes that will attract the industry.

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