NYDFS sets cryptocurrency guidelines for banks

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Short dive:

  • Banks overseen by the New York Department of Financial Services (NYDFS) must seek prior approval before engaging in any cryptocurrency-related activity, the regulator said in guidance issued Thursday.
  • Firms already involved in cryptographic activity must notify NYDF extension immediately, the agency said.
  • NYDFS considers six broad categories when evaluating an institution’s proposal: business plan, risk management, corporate governance and oversight, consumer protection, financials, and legal and regulatory analysis, the agency said. Approval applicants must also provide a checklist of documents and information for NYDF extension to review.

Dive information:

The NYDFS guide takes a page from many other regulators. The Federal Deposit Insurance Corp. (FDIC) told banks in April to notify the agency if they are engaging in cryptographic activity.

The Federal Reserve told banks in August to notify their primary point of contact at the central bank to ensure the activity is legal.

The Office of the Comptroller of the Currency (OCC), by comparison, has outlined some activities it considered legal – while the Fed did not – and has allowed banks to engage in such activities provided they demonstrate they have adequate controls in place and obtain the first the non-objection of the regulator.

In revealing its evaluation criteria, the NYDFS may come closest — at least in amount of detail — to the OCC.

“It is imperative that regulators communicate in a timely and transparent manner about the evolution of our regulatory approach,” NYDFS Superintendent Adrienne Harris said Thursday. “Today’s guidance is critical to ensuring that consumers’ hard-earned money is protected, that New York’s regulated banking organizations remain resilient and competitive, and that expectations are clear for those wishing to submit proposals for virtual currency-related businesses.”

U.S. banks and foreign banks planning to launch virtual currency-related businesses must submit a proposal at least 90 days before planning the business, the NYDFS said.

Banks that use third parties to conduct cryptocurrency-related business must also comply with the guidance, the agency said.

The guidance comes amid an implosion in the cryptocurrency industry, which has seen several high-profile bankruptcies including FTX, BlockFiVoyager and Celsius.

The department’s review process is designed to ensure that the institutions it audits have adequate financial and risk management capabilities, Harris told the Wall Street Journal.

Although FTX said it was seeking a license in New York when it filed for bankruptcy, a NYDFS spokesperson said the cryptocurrency exchange did not get approval, the outlet noted.

Sens. Elizabeth Warren, D-MA, and Tina Smith, D-MN, asked the Fed, OCC and FDIC to review the relationship between banks and cryptocurrency companies after the collapse of FTX.

The OCC, for its part, reiterated its concern about banks’ approach to cryptocurrencies in its Semi-Annual Risk Outlook a week ago. The agency advised financial institutions to “take a careful and incremental approach to ensure adequate risk management controls and practices before downsizing or undertaking additional business.”

The NYDFS this month proposed charging state-licensed crypto firms for oversight and scrutiny.

“As the virtual currency industry evolves, DFS is leading the way and will continue to be committed to maintaining New York as the model for robust, forward-thinking regulation,” the agency said at the time.

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