- Key insight: NYDFS requires banks to use blockchain analytics for crypto transaction monitoring.
- Expert quote: Compliance functions at traditional banking institutions "must adapt," according to Adrienne Harris, NYDFS superintendent.
- Supporting data: NYDFS fined Block $40 million earlier this year for AML failures, signaling enforcement intensity.
Overview bullets generated by AI with editorial review
The New York Department of Financial Services, or NYDFS, on Wednesday issued guidance requiring all New York banking organizations to leverage blockchain analytics tools to comply with transaction monitoring and risk assessment regulations.
The department stressed that these tools, which use information about currency flows between crypto wallets, can help banks understand their customers' exposure to money laundering, terrorism financing, sanctions violations and other financial crimes.
"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," Harris said in
DFS "will continue to set clear and transparent expectations for institutions, to protect consumers and safeguard market integrity, while also ensuring New York-regulated banking organizations can remain resilient and competitive," she said.
The department said that banks and credit unions are experiencing "increasing interest in and exposure to virtual currency" both through their own activities and through customers.
As such, NYDFS expects all financial institutions it regulates "to consider incorporating blockchain analytics as an additional risk-management tool."
Broad applicability for banks and credit unions
The letter sent Tuesday from NYDFS to all companies it regulates outlines several applicable use cases for blockchain analytics, many directly relevant to how financial institutions interact with the crypto ecosystem through their customers:
- Screening customer wallets: Banks must screen "wallets of customers who have disclosed or exhibited crypto-related transactions, to assess risk exposure."
- Verifying the source of funds: Institutions need to verify "the source of incoming funds originating from virtual asset service providers (VASPs)." Although the letter does not define VASPs, it likely includes any company that enables customers to buy and sell crypto, such as crypto exchanges.
- Holistic ecosystem monitoring: Banks should monitor "the crypto ecosystem holistically, to assess customer (e.g., VASP) exposure to money laundering, sanctions violations or other predicate crimes."
- Third-party risk assessment: Organizations must identify and "gauge the risk of third parties (e.g., VASP counterparties) with which a customer has engaged."
- Evaluating customer activity: Institutions should evaluate "expected versus actual activity (e.g., dollar thresholds) of customers engaging in virtual currency activity."
NYDFS stressed that these controls must be "tailored" to the bank's "business model, risk appetite and operations."
Building on previous guidance and enforcement actions
The Wednesday guidance expands on guidance issued in April 2022 by NYDFS, specifically to so-called virtual currency business entities, stressing the importance of blockchain analytics for effective customer due diligence, transaction monitoring and sanctions screening.
That guidance highlighted how virtual currencies, despite their pseudonymity, offer provenance tracing on public blockchains, providing "greater visibility into transaction lineage," according to the earlier letter.
That guidance listed augmenting know-your-customer, or KYC, transaction monitoring of on-chain activity and sanctions screening as key control measures.
Additionally, in a December 2022 letter, NYDFS reminded all banks that operate in New York to seek prior approval from the department before engaging in "new or significantly different virtual currency-related activity."
Recent enforcement actions underscore the regulator's serious stance on crypto compliance.
In April, NYDFS
Block's lax treatment of high-risk bitcoin transactions allowed largely anonymous transactions to proceed without proper scrutiny, the department said. Block's rapid growth between 2019 and 2020 contributed to a severe transaction alert backlog, which Block left unaddressed for a significant period of time.
Vendors offering blockchain analysis solutions
Banks and credit unions have a variety of blockchain analytics vendors available to them.
Vendors offering blockchain analytics include Elliptic, TRM Labs, Chainalysis, CipherTrace and Crystal Blockchain. These companies offer near-comprehensive coverage of public blockchains where virtual assets are traded.
These vendors offer a combination of compliance programs, due diligence services, wallet screening, transaction monitoring, tailored training for compliance teams, illicit activity tracing and other services.
