NY State Setting Standards for Crypto Monitoring

The NYS Department of Financial Services (DFS) took an uncommon approach in encouraging cryptocurrency firms to enhance their risk management practices – in guidance issued in late April, they stated that firms “must” implement certain RegTech solutions. The DFS guidance focused on three areas: (1) augmented KYC controls to identity ‘high risk’ wallets; (2) blockchain tracing tools to identify suspicious on-chain transactions; and (3) conducting sanction screening of on-chain transactions. Why this matters? Cryptocurrency firms regulated by the DFS are being held to a higher standard as to what constitutes appropriate controls compared to those licensed in other States. Firms that aren’t implementing reasonable solutions to address these three areas face significant liability should their platforms be used for illicit activity.