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An alleged co-mingling of funds at the defunct cryptocurrency exchange FTX and its associated trading firm Alameda Research resulted in billions of dollars in consumer losses, according to new recommendations that New York’s leading financial regulator released on 23 January 2023. The New York State Department of Financial Services (NYDFS), one of the few state organisations with such a regulatory framework, mandates that state-regulated businesses disclose to customers how they manage its clients’ digital money.
Why Does New York Financial Regulator Want Co-Mingling Crypto Funds?
FTX, Celsius Network, and recently Genesis Global Capital, whose borrowing unit filed for U.S. bankruptcy protection on 19 January 2023, are among the crypto firms that have declared bankruptcy as a result of the market collapse that will wipe out about $1.3 trillion from the value of crypto tokens in 2022. The guidance is the most recent in a series of crypto-related directives NYDFS issued in the past year.
It happens at a time when federal regulators have issued warnings about the absence of consumer protections in the cryptocurrency industry, including the U.S. Commodity Futures Trading Commission (CFTC). With congressional legislation that would give them extra authority, federal agencies like the CFTC claim that most of what they can do is unrestricted.
According to Adrienne Harris, the Superintendent of NYDFS: “It’s timely, but truth be told, it was something we had on our policy roadmap even before FTX”
Sam Bankman-Fried, the Founder of FTX, is charged by federal prosecutors in Manhattan with looting billions of dollars in client cash to cover losses at his investment firm, Alameda Research. Concerns over the overlap between the two businesses contributed to a wave of client withdrawals in November 2022 that led to the exchange’s bankruptcy filing. Bankman-Fried has entered a not-guilty plea and denied any criminal activity.
Harris, a former senior counsellor at the U.S. Treasury Department who was confirmed as superintendent last year, has spent most of her first year in the position enhancing her agency’s attention on cryptocurrency. According to her, the NYDFS virtual currency business currently has close to 50 people and is looking to expand.
New York businesses must submit to inspections to operate legally and comply with state laws about know-your-customer, anti-money laundering, and capital requirements. The majority of other states don’t inspect cryptocurrency companies.
Harris stated, “I think it’s absolutely fair to argue that New Yorkers are better off than everybody else in the country because of the framework we have. However, I would never be naïve enough to suggest that no New Yorker will be damaged in all of this.”
Experts in DeFi at Bitsoft 360 report that the state’s citizens were nonetheless affected by the crypto meltdowns of the previous year.
Letitia James, the Attorney General of New York, filed a lawsuit against Alex Mashinsky, the Founder of Celsius Network, alleging that he committed fraud against investors for billions of dollars in cryptocurrency by concealing the deteriorating state of his now-bankrupt cryptocurrency lending platform.
James claimed that about 26,000 New Yorkers were among the victims of Mashinsky’s alleged scam, which allegedly occurred between 2018 and June 2022, when deposits were stopped. Mashinsky’s attorney refuted the charges. NYDFS did not immediately answer a request for comment regarding the Celsius lawsuit.
When Genesis Global Capital suspended customer withdrawals in November 2022, the cryptocurrency exchange Gemini, which has a limited-purpose trust charter in New York and is allowed to serve New York residents, locked customers out of their accounts. Gemini had partnered with Genesis Global Capital, which is now bankrupt, to offer a crypto yield product. Genesis allegedly owes Gemini $900 million.
Harris acknowledges that her office can do more, and she notes that new guidelines on stablecoins, advertising and disclosures in the cryptocurrency industry, and consumer protection are all being developed by her agency.
She added that enforcing anti-money laundering regulations by cryptocurrency firms has also been “a huge challenge” and that her office will continue to focus on this issue in 2023.
The NYDFS announced a $100 million settlement with Coinbase Inc. earlier this month regarding the company’s adherence to anti-money laundering regulations. The agency fined Robinhood Markets Inc.’s cryptocurrency division $30 million for allegedly breaking consumer protection, cybersecurity, and anti-money laundering laws.
Regardless, Harris mentioned in an interview that: “We’ve really been working hard, not just through enforcement, but through examination, and just in our conversations with industry to say this is a non-negotiable,”
As the nation’s financial hub, New York has the country’s most extensive and detailed crypto rules. Nearly six years after the creation of Bitcoin, the NYDFS recognised the potential significance of cryptocurrencies. It established the “BitLicense” — a component of crypto regulation. Reactions to the BitLicense have been mixed. Some people have welcomed the regulation as a transparent but strict foundation for cryptocurrencies to gain acceptance in the mainstream, while others have criticised it as being unnecessarily strict. Whether these policies inspire optimism or worry, many people and businesses agree that they are essential to comprehend fully.
Byline: Hannah Parker
