Important news regarding crypto fraud. It is the New York financial regulator that is setting the tone, recently updating its monitoring tools against crypto fraud. Let’s look in detail at what has happened.
Summary
New York financial services implements controls for crypto fraud
The New York State Department of Financial Services has strengthened its ability to detect fraud in the virtual currency industry by building on previous guidelines on preventing illicit activity.
Its enhanced ability to identify insider trading and market manipulation in New York State-regulated companies engaged in virtual currency activities comes at a time when the cryptocurrency industry remains under pressure after the collapse of big names such as Celsius Network, Terra/LUNA and FTX.
The New York regulator has boosted its capabilities with new tools to monitor the risk of insider trading and market manipulation.
The NYDFS will leverage technology to detect potential insider trading, market manipulation, and front-running activity associated with the exposure of Department-regulated entities and applicants or potential exposure to listed virtual currency wallet addresses.
The Superintendent of the New York State Department of Financial Services, Adrienne A. Harris, commented on the matter:
“This is a significant step in our oversight of the virtual currency industry as it continues to rapidly transform and mature. These tools will help us fight financial crime and fraud, hold regulated entities accountable, and further strengthen our national leadership in supervising virtual currency.”
The announcement draws on recently published guidelines on the use of blockchain analytics, criteria for USD-backed stablecoins, and new guidelines related to virtual currency insolvency or similar proceedings.
What the new crypto fraud regulation includes
The new guidance applies to those entities that the Department has authorized or chartered for safekeeping, or temporarily holds, stores or maintains virtual currency assets on behalf of its customers.
As stewards of others’ assets, virtual currency entities that serve as custodians, including but not limited to storing, holding or maintaining custody or control of virtual currency on behalf of others, must have robust processes in place, similar to traditional financial service providers.
New York’s virtual currency regulations require entities, among other things, to hold virtual currency in a manner that protects clients’ assets. It also requires them to maintain complete books and records and to adequately disclose the material terms and conditions associated with their products and services, including custodial services.
Not only that, it also requires them to refrain from making false, misleading or deceptive statements or omissions in their marketing materials. Entities operating under the BitLicense and Limited Purpose Trust Charter are required to comply with these requirements through DFS supervision and examinations or, if necessary, enforcement actions.
Guidance in case of crypto insolvency: the details
In January, Adrienne A. Harris, superintendent of the New York Department of Financial Services, released guidance on protecting consumers in the event of virtual currency insolvency.
The New York regulator’s guidance reiterates the department’s expectation of sound custody and disclosure practices for licensed entities. According to the document, it is of paramount importance that the fair and beneficial interest of the asset remains with the customer at all times.
Adrienne A. Harris, NYDFS Superintendent, had stated on the subject:
“DFS virtual currency regulation has been protecting New Yorkers since 2015. Today’s guidance reminds DFS-regulated virtual currency firms of our expectations regarding the safekeeping of customers’ assets.”
The new insolvency regulatory guidance specifically addresses segregation and separate accounting for client virtual currency.
This means that in order to properly custody a client’s virtual currency and maintain appropriate books and records, a VCE custodian (“a virtual currency entity” serving as custodian) should separately account for and segregate a client’s virtual currency from the corporate resources of the VCE Custodian and its affiliated entities. Both on-chain and on the VCE Depository Bank‘s internal accounting accounts.
