New York Regulator Urges Banks to Embrace Blockchain Analytics for Virtual Currency Risk Management
In a recent industry letter, New York’s top financial regulator has advised state-chartered banks and foreign branches operating in the state to consider expanding their use of blockchain analytics when dealing with virtual currency. The move comes as a response to the increasing risks related to money laundering, sanctions violations, and other illicit activities in the digital asset space.
Superintendent Adrienne Harris of the Department of Financial Services emphasized the effectiveness of blockchain analytics in helping licensed virtual currency companies manage risks and suggested that banks engaging directly in digital assets or encountering crypto activity through their customers should also leverage these tools.
The department initially issued guidance on blockchain analytics in April 2022 for firms holding state virtual currency licenses. Since then, there has been a growing interest and exposure to virtual currency among banks, prompting the regulator to recommend similar safeguards for traditional financial institutions.
Banks are encouraged to use blockchain analytics for various purposes, including screening customer wallets, verifying the origin of crypto-linked funds, monitoring activity in the digital asset ecosystem, and evaluating counterparties such as virtual asset service providers. Additionally, they should compare expected versus actual activity, develop risk assessments based on network-wide intelligence, and assess the risks associated with introducing new virtual currency products.
It is important for banks to tailor their controls to their specific risk appetite and operations, with Superintendent Harris stressing the need to regularly update compliance frameworks as markets, customers, and technologies evolve. The guidance underscores the significance of adopting new tools to address emerging threats posed by evolving technologies.
Blockchain analytics can help banks protect the financial system from a range of threats, including terrorist financing and sanctions evasion. While the guidance does not introduce new regulations, it highlights the importance of traditional banks adopting risk-monitoring standards that have long been applied to licensed crypto firms.
Overall, the use of blockchain analytics is seen as a crucial step in enhancing risk management practices for virtual currency transactions. By embracing these tools, banks can better safeguard themselves and their customers against illicit activities in the rapidly evolving digital asset landscape.