New York’s financial regulator is targeting companies that mix crypto funds
Jan 23 (Reuters) – New York’s financial regulator will on Monday issue new guidance dictating that companies separate clients’ crypto assets from their own, after alleged commingling of funds by collapsed crypto exchange FTX and its affiliate trading firm Alameda Research led to huge losses for clients.
The New York State Department of Financial Services (NYDFS), which leads one of the few state agencies with a regulatory system in place for cryptocurrency companies, will also mandate that state-regulated companies disclose to customers how they stand for their customers’ digital currency.
The guidance is the latest in a series of crypto-related directives the NYDFS has issued over the past year, which saw a market collapse that wiped out about $1.3 trillion of the value of crypto tokens by 2022. The meltdown triggered the bankruptcies of crypto firms such as FTX, Celsius Network and most recently Genesis Global Capital, whose lending unit filed for US bankruptcy protection on Thursday.
It comes as federal regulators such as the US Commodity Futures Trading Commission (CFTC) warn about the lack of consumer protections in the crypto sector. Federal agencies like the CFTC say much of what they can do is limited without congressional legislation that would give them additional authority.
“It’s timely, but truth be told, it was something we had on our policy roadmap even before FTX,” Adrienne Harris, superintendent of the NYDFS, said in an interview.
Federal prosecutors in Manhattan have accused FTX founder Sam Bankman-Fried of stealing billions of dollars in client funds to cover losses at his hedge fund, Alameda Research. Concerns about the transition between the two firms contributed to a flurry of customer withdrawals in November, forcing the exchange to file for bankruptcy. Bankman-Fried has denied criminal offenses and is pleading not guilty.
CRYPTO MELTDOWNS
Harris, who was confirmed as superintendent last year and is a former senior adviser at the US Treasury Department, has spent much of his first year in the role strengthening the agency’s crypto focus. She says the virtual currency unit at NYDFS has nearly 50 employees, and is working to hire more.
New York requires firms to undergo due diligence to ensure they are in line with state requirements and comply with know-your-customer, anti-money laundering and capital requirements. Most other states do not subject crypto firms to investigations.
“While I would never be foolhardy enough to say that no New Yorker will be harmed in all of this, I think it’s very fair to say that New Yorkers are better off than anyone else in the country because of the framework that we have,” Harris Harris. so.
Nonetheless, the crypto meltdowns of the past year have still affected the state’s residents.
New York Attorney General Letitia James sued Celsius Network founder Alex Mashinsky earlier this month, alleging he defrauded investors out of billions of dollars in digital currency by concealing the failing health of his now-bankrupt cryptocurrency lending platform.
James said Mashinsky’s alleged fraud ran from 2018 to June 2022, when deposits were frozen, with more than 26,000 New Yorkers among his victims. A lawyer for Mashinsky has denied the allegations. NYDFS declined to comment on the Celsius lawsuit.
ADDITIONAL GUIDELINES
Crypto exchange Gemini, which has a limited trust charter in New York and is licensed to serve New York residents, had partnered with now-bankrupt Genesis Global Capital to offer a crypto interest product, and locked out clients from accessing those accounts when Genesis The customer suspended withdrawals in November. Gemini says it owes $900 million from Genesis.
Harris says she realizes her office can do more, and says her agency is working on additional guidance on stablecoins, advertising and disclosures in crypto and consumer protection.
Crypto firms’ compliance with anti-money laundering rules has also been “a big issue,” she said, an issue she expects her office to continue to focus on in 2023.
Earlier this month, the NYDFS announced a $100 million settlement with Coinbase Inc ( COIN.O ) over the firm’s compliance with anti-money laundering rules. It followed a $30 million fine the department levied on the crypto arm of Robinhood Markets Inc ( HOOD.O ) for alleged violations of anti-money laundering, cybersecurity and consumer protection rules.
“We’ve really worked hard, not just through enforcement, but through investigations, and just in our conversations with the industry to say this is a non-negotiable,” Harris said.
Reporting by Hannah Lang in Washington; Editing by Ira Iosebashvili, Diane Craft and Emelia Sithole-Matarise
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