New York Financial Regulator Targets Firms Pooling Cryptocurrency Funds

Hannah Lang

(Reuters) – New York’s top financial regulator is issuing new guidance on Monday directing companies to separate clients’ crypto assets from their own after a purported pooling of funds at bankrupt crypto exchange FTX and its affiliate trading firm Alameda Research resulted in billions of dollars in losses for clients.

The New York State Department of Financial Services (NYDFS), which leads one of the few government agencies with a crypto-company regulatory system, will also require state-regulated companies to disclose to customers how they account for customers’ digital currency.

This guidance is the latest in a series of crypto-related NYDFS directives issued last year that led to a market crash that wiped out about $1.3 trillion of crypto token value in 2022 and fueled the bankruptcy of crypto firms such as FTX, Celsius Network. and, most recently, Genesis Global Capital, whose lending arm filed for US bankruptcy protection on Thursday.

This is because federal regulators such as the US Commodity Futures Trading Commission (CFTC) are warning about the lack of consumer protection in the crypto sector. Federal agencies such as the CFTC say much of what they can do is limited without congressional legislation to give them additional powers.

“It’s timely, but truth be told, it was on our policy roadmap before FTX,” Adrienne Harris, NYDFS superintendent, said in an interview.

The Manhattan federal prosecutor’s office has accused FTX founder Sam Bankman-Fried of stealing billions of dollars in client funds to cover the losses of his hedge fund Alameda Research. Concerns about a move between the two firms sparked a flurry of customer withdrawals in November, forcing the exchange to file for bankruptcy. Bankman-Fried denied any criminal wrongdoing and pleaded not guilty.

Harris, who was confirmed as superintendent last year and is a former senior advisor at the U.S. Treasury Department, spent much of her first year in a role supporting her agency’s crypto focus. She says the virtual currency division at NYDFS has almost 50 employees and is working on hiring more.

The story goes on

New York requires firms to undergo audits to make sure they comply with state requirements and comply with know-your-customer, anti-money laundering and capital requirements. Most other states do not subject crypto firms to scrutiny.

“While I would never be so reckless as to say that no New Yorker will suffer in all of this, I think it is very fair to say that New Yorkers live better than anyone else in the country, because of the structure we have,” Harris. said.

However, the collapse of last year’s cryptocurrencies still affected the people of the state.

New York Attorney General Letitia James earlier this month sued Celsius Network founder Alex Mashinsky, alleging he swindled investors of billions of dollars in digital currency by hiding the unsatisfactory state of his now bankrupt cryptocurrency lending platform.

James said that Mashinsky’s alleged scam lasted from 2018 to June 2022 when deposits were frozen and included more than 26,000 New Yorkers among its victims. Mashinsky’s lawyer denied the accusations. The NYDFS did not immediately respond to a request for comment on the Celsius lawsuit.

Cryptocurrency exchange Gemini, which has a limited purpose trust in New York and is authorized to serve New Yorkers, partnered with the now-bankrupt Genesis Global Capital to offer a crypto income product and blocked clients from accessing those accounts when Genesis blocked the client. . withdrawals in November. Gemini says it owes Genesis $900 million.

Harris says she understands her office can do more and says her agency is working on additional guidance on stablecoins, crypto advertising and disclosure, and consumer protection.

Crypto firms’ compliance with anti-money laundering regulations has also been a “big challenge,” she says, and she expects her office to continue paying attention in 2023.

Earlier this month, the NYDFS announced a $100 million payout from Coinbase Inc in connection with the firm’s compliance with anti-money laundering regulations. This followed a $30 million fine the department imposed on the cryptocurrency arm of Robinhood Markets Inc for alleged violations of anti-money laundering, cybersecurity and consumer protection regulations.

“We’ve been working really hard, not just through enforcement, but through verification, and just in our conversations with the industry to say it’s non-negotiable,” Harris said.

(Reporting by Hannah Lang in Washington; edited by Ira Iosebashvili and Diane Kraft)

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