Crypto Firms Should Use Blockchain Analytics, New York Regulator Says

The guidance marks the first time any state or federal regulator has set explicit expectations for cryptocurrency transaction monitoring and the use of blockchain analytics, according to

Laurel Loomis Rimon,

a partner at law firm Paul Hastings LLP who specializes in white-collar defense and investigations.

New York’s financial regulator plays an outsize role in financial regulation and enforcement nationwide, especially considering the importance of the New York market to many crypto firms. Although it isn’t clear whether other state regulators would follow suit, “it’s almost as if the NYDFS is saying the quiet part out loud,” Ms. Loomis Rimon said of the guidance. “This is very much in line with what [the federal government’s] expectations would be,” she said.

“Blockchain analytics tools provide companies with an efficient, data-driven way to conduct customer due diligence, transaction monitoring and sanctions screening, among other things, which are all critical elements of our virtual currency regulation,” Ms. Harris said in a statement. “We expect regulated entities to utilize best practices to uphold the safety and soundness of the virtual currency market and to protect consumers.”

Certain characteristics of virtual currency can present compliance challenges, according to the guidance. For instance, the letter said virtual currencies, such as bitcoin and ether, can be transferred peer-to-peer directly without the use of a regulated third party, such as between noncustodial wallets.

But the new technologies also can help improve control measures, such as through provenance tracing, the guidance said. “The blockchain ledger’s immutability typically allows a historical view of a virtual currency transmission between wallet addresses, providing the opportunity for greater visibility into transaction lineage than is typically found with traditional, fiat funds transfers,” according to the letter.

The NYDFS emphasized that virtual currency firms are encouraged to use blockchain analytics for compliance, including for due-diligence controls and for conducting sanctions screening and transaction monitoring.

“For firms already using blockchain analytics technology, DFS’s guidance formalizes expectations about how those services should be utilized, whether provided in-house or by third-party blockchain analytics firms,” Ms. Loomis Rimon said. “For companies without blockchain analytics on board, the guidance is a mandate.” She added that regulators now expect crypto exchanges to monitor their direct and indirect exposure to illicit activities through blockchain analytics.

Write to Mengqi Sun at [email protected]