On September 17, the New York State Department of Financial Services (NYDFS) issued fresh guidance regarding the use of blockchain analytics tools for covered banking institutions involved in virtual currency activities. NYDFS Superintendent Adrienne A. Harris highlighted the importance of these tools in enhancing compliance programs and mitigating risks associated with emerging technologies while also preventing illegal activities.
The guidance specifically addresses how covered institutions, which include New York banking organizations and branches of licensed foreign banking entities, can leverage blockchain analytics tools in various ways. These include assessing risk exposure through customer wallet screenings, verifying the source of incoming funds from virtual asset service providers, and conducting comprehensive monitoring of the digital asset ecosystem to evaluate customer exposure to illicit or sanctioned activities. Additionally, the guidance encourages institutions to identify and evaluate risks associated with third parties that customers engage with, as well as to compare expected and actual activity levels for virtual currency transactions. The data gained from such monitoring can further refine each institution’s risk assessment and risk appetite.
Moreover, the guidance suggests weighing the risks connected to any virtual currency products or services that institutions plan to offer. It is emphasized that the list provided is not exhaustive, urging covered institutions to tailor the utilization of blockchain analytics tools to fit their specific risk appetite and business model. Regular reassessment of risk-management frameworks is also necessary to adapt to evolving business models, new customer types, and market entrants.
This announcement builds on previously released NYDFS guidance, including a notable April 2022 directive regarding the use of blockchain analytics targeted at licensed virtual currency businesses and chartered limited purpose trust companies in New York. Following that, NYDFS issued its Virtual Currency Regulatory Authority (VCRA) Guidance, which indicated that covered institutions must seek prior approval for any new or significantly altered virtual currency activities. Despite the continued relevance of the VCRA Guidance, federal banking regulators have rescinded their similar guidance earlier this year, marking a significant shift in the regulatory landscape.
