New York Financial Regulator Targets Firms That Mix Crypto Funds

Jan 23 (Reuters) – New York’s chief financial regulator is expected to issue new guidelines on Monday dictating firms to segregate clients’ crypto assets from their own, after an alleged mix of funds in the collapse of crypto exchange FTX and its commercial affiliate Alameda Research leads to billions of dollars in losses for customers.

The New York State Department of Financial Services (NYDFS), which runs one of the few state agencies with a regulatory system in place for cryptocurrency companies, will also stipulate that regulated companies government disclose to customers how they account for customers’ digital currency.

The guidelines are the latest in a series of crypto-related guidelines that NYDFS issued last year, which saw a market meltdown that wiped around $1.3 trillion from the value of crypto tokens in 2022 and triggered the bankruptcies of crypto firms such as FTX, Celsius Network and, most recently, Genesis Global Capital, whose lending unit filed for bankruptcy protection in the United States on Thursday.

This comes as federal regulators such as the US Commodity Futures Trading Commission (CFTC) warn of the lack of consumer protections in the crypto industry. Federal agencies like the CFTC say much of what they can do is limited without congressional legislation that would give them additional powers.

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

Federal prosecutors in Manhattan have accused FTX founder Sam Bankman-Fried of stealing billions of dollars in client funds to make up for losses at his hedge fund, Alameda Research. Concerns over the crossover between the two companies helped fuel a wave of customer withdrawals in November, forcing the exchange to file for bankruptcy. Bankman-Fried denied any foul play and pleaded not guilty.

Harris, who was confirmed as superintendent last year and is a former senior adviser to the U.S. Treasury Department, has spent much of her first year in the role bolstering her agency’s focus on crypto. She says NYDFS’ virtual currency unit has nearly 50 employees and is working to hire more.

New York requires businesses to undergo reviews to ensure they are compliant with state requirements and comply with know-your-customer, anti-money laundering, and capital requirements. Most other states do not subject crypto companies to reviews.

“While I would never be bold enough to say that no New Yorkers will be harmed in all of this, I think it is very fair to say that New Yorkers are better off than anyone else. in the country because of the framework we have,” Harris said.

Nevertheless, last year’s crypto meltdowns still affected residents of the state.

Earlier this month, New York Attorney General Letitia James sued Celsius Network founder Alex Mashinsky, claiming he defrauded investors of billions of dollars in digital currency by covering up his failing health. 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 its victims. A lawyer for Mashinsky denied the allegations. NYDFS did not immediately respond to a request for comment on the Celsius lawsuit.

Crypto exchange Gemini, which has a limited-purpose 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 yield product , and blocked customers from accessing those accounts when Genesis suspended the customer. withdrawals in November. Gemini says he owes Genesis $900 million.

Harris says she recognizes her office can do more and says her agency is working on additional guidance on stablecoins, crypto advertising and disclosures, 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, NYDFS announced a $100 million settlement with Coinbase Inc. (COIN.O) on the company’s compliance with the rules for the prevention of money laundering. This follows a $30 million fine the department imposed 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 review, and just in our conversations with industry to say it’s non-negotiable,” Harris said.

Reporting by Hannah Lang in Washington; Editing by Ira Iosebashvili and Diane Craft

Our standards: The Thomson Reuters Trust Principles.


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