NYDFS ISSUES GUIDANCE FOR BANKS REGARDING BLOCKCHAIN RISKS

NYDFS issued guidance for regulated banking institutions concerning their approach to risks associated with cryptocurrency businesses that may be bank customers or that interact with bank customers

·       The guidance sensibly responds to the more permissive regulatory environment for cryptocurrency filtering down from the Trump Administration’s major policy shifts

·       The guidance principally relates to the use of blockchain analytics, requiring the following from licensed banks:

o  Screening wallets of customers who have disclosed or exhibited crypto-related transactions, to assess risk exposure;
o  Verifying the source of incoming funds originating from virtual asset service providers (“VASPs”);
o  Monitoring the crypto ecosystem holistically, to assess customer (e.g., VASP) exposure to money laundering, sanctions violations, or other predicate crimes;
o  Identifying and gauging the risk of third parties (e.g., VASP counterparties) with which a customer has engaged;
o  Evaluating expected versus actual activity (e.g., dollar thresholds) of customers engaging in virtual currency activity;
o  Utilizing intelligence gained from holistic monitoring to further develop the regulated entity’s risk assessments and risk appetite;
o  Weighing the risks associated with a virtual currency product or service to be offered.

·       The new guidance builds on the Department’s prior guidance to virtual currency businesses in 2022, which likewise prescribed the use of blockchain analytics