NYDFS Issues Guidance on Use of Blockchain Analytics

On September 17, New York State Department of Financial Services ("NYDFS") Superintendent Adrienne A. Harris issued new guidance on the use of blockchain analytics tools for covered banking institutions contemplating or already conducting virtual currency-related activities. The guidance notes that blockchain analytics tools can enhance compliance programs to mitigate risks associated with emerging technologies and prevent illegal activities. Specifically, NYDFS suggests that New York banking organizations, as well as all branches and agencies of NYDFS-licensed foreign banking organizations (collectively, "Covered Institutions"), consider the utility of blockchain analytics tools to:

1. assess risk exposure through customer wallet screening;
2. verify the source of incoming funds originating from virtual asset service providers;
3. conduct holistic monitoring of the digital asset ecosystem to assess customer exposure to illicit or sanctioned activity;
4. identify and evaluate the risk of third parties (e.g., counterparties of a virtual asset service provider) with which a customer has engaged;
5. evaluate expected versus actual activity (e.g., dollar thresholds) of customers engaging in virtual currency activity;
6. utilize intelligence gained from holistic monitoring to further develop the Covered Institution's risk assessment and risk appetite; and
7. weigh the risks associated with a virtual currency product or service to be offered.

The guidance notes that the above list of examples is not exhaustive and suggests that Covered Institutions consider leveraging blockchain analytics tools to enhance compliance programs and risk frameworks in a manner tailored to the institution's particular risk appetite and business model. The guidance further emphasizes that Covered Institutions must re-assess risk-management frameworks regularly in light of changing business models, new customer types, and new market entrants.

The announcement builds upon previously released NYDFS industry guidance, including the regulator's April 2022 Guidance on Use of Blockchain Analytics issued to all licensed virtual currency business entities and chartered limited purpose trust companies authorized to engage in virtual currency business activities in New York. NYDFS subsequently published its "VCRA Guidance," which stated the regulator's expectation that all Covered Institutions seek prior approval before engaging in new or significantly different virtual currency- related activity. While the VCRA Guidance is still in effect, each of the federalbankingregulators rescinded their similar guidance this year.