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NYDFS Issues Guidance Encouraging Use of Blockchain Analytics by Crypto Firms
Practical Law Legal Update w-035-4776 (Approx. 5 pages)
NYDFS Issues Guidance Encouraging Use of Blockchain Analytics by Crypto Firms
by Practical Law Finance
| Published on 09 May 2022 • USA (National/Federal) |
The New York Department of Financial Services (NYDFS) issued guidance emphasizing to all New York licensed and regulated virtual currency (VC) entities the importance of blockchain analytics to ensure compliance with applicable state regulations, as well as federal BSA/AML and economic sanctions requirements.
On April 28, 2022, NYDFS issued guidance on the use of blockchain analytics, emphasizing to all virtual currency (VC) business entities that are either licensed under New York's Compilation of Codes, Rules and Regulations (23 NYCRR Part 200) or chartered as a limited purpose trust company under the New York Banking Law (collectively, VC entities) the importance of blockchain analytics in creating effective policies, processes, and procedures relating to customer due diligence, transaction monitoring, and sanctions screening.
According to the guidance, licensed VC entities must ensure that their compliance programs fully take into account the unique characteristics of the applicable VCs being used, in order to effectively address compliance requirements under:
- the New York Banking Law.
- the New York Financial Services Law.
- The Bank Secrecy Act (BSA),
- Anti-money laundering (AML) regulations.
- US economic sanctions implemented by the US Department of the Treasury's Office of Foreign Assets Control (OFAC).
Given the specific characteristics of VCs, NYDFS emphasizes the importance of blockchain analytics to VC entities in addressing, for example, AML requirements under 23 NYCRR § 200.15, and across a range of BSA/AML and OFAC-related compliance controls, including but not limited to:
- Augmenting know your customer (KYC) controls by obtaining and maintaining information regarding, and understanding and effectively addressing, the risks presented by their customers and potential customers.
- Conducting transaction monitoring of on-chain activity by through appropriate control measures to monitor and identify unusual activity tailored to the VC entity’s risk profile.
- Conducting sanctions screening of on-chain activity through risk-based policies, processes, and procedures to identify transaction activity involving VC addresses or other identifying information associated with sanctioned individuals and entities listed on the SDN List or located in sanctioned jurisdictions.
NYDFS guidance notes that VC entities can use third-party service providers or internally developed blockchain analytics products and services for additional control measures, whether separately or in combination. To the degree that VC entities outsource such control functions, \ the VC entity must have clearly documented policies, processes, and procedures regarding how the blockchain analytics activity integrates into the VC entity’s overall control framework consistent with the VC entity’s risk profile.
NYDFS notes that a VC entity whose operations are limited to VC custody with design features in place that prohibit or otherwise limit transmission of VCs into or outside of the VC entity may present significantly different risks (and attendant blockchain analytics possibilities) than a VC entity with a high volume and value of VCs that allow for customer deposits and withdrawals across permissionless networks.
For additional information on the NYDFS regulatory framework for VC, see Practice Note, NYDFS Virtual Currency BitLicense Framework: Overview.
For additional information on US AML regulations, see Practice Note, US Anti-Money Laundering and Trade Sanctions Rules for Financial Institutions.