On September 17, the New York State Department of Financial Services (DFS) issued new guidance on the use of blockchain analytics tools. This new guidance builds upon the blockchain guidance issued by DFS in 2022, and applies to all New York banking organizations and branches and agencies of foreign banking organizations that are licensed by the DFS (covered institutions).
The guidance urges covered institutions that engage in virtual currency-related activities (VCRAs) to incorporate blockchain analytics tools as part of their overall compliance programs and risk models. In doing so, the DFS recognizes that the extent to which a covered institution leverages blockchain analytics should be tailored to each institution’s business model, risk appetite, and operations.
The guidance identifies the following example use cases:
- Customer Wallet Screening and Funds Verification: By screening customer wallets and verifying funds from virtual asset service providers (VASPs), institutions can better assess risk exposure of customer virtual currency activities.
- Holistic Monitoring for Illicit Activities: Blockchain analytics can enhance the monitoring of the crypto ecosystem, helping institutions better assess customers’ potential exposure to money laundering, sanctions violations, and other illicit activities, as well as other third-party risks.
- Augmented Due Diligence Controls: Blockchain analytics can help evaluate expected versus actual customer virtual currency activity, which is critical for appropriately identifying and managing compliance risks.
- Risk Assessments of Virtual Currency Products: Blockchain analytics are critical for understanding risks associated with offering new VCRAs and adapting the institution’s risk management framework.
As traditional banking institutions are increasingly exposed to risks related to virtual currencies, these institutions must adapt their risk management and compliance approaches and evaluate how new technologies can help address the unique challenges posed by VCRAs. The DFS guidance serves as a call to action for banking organizations to leverage blockchain analytics tools effectively, as they continue to adapt their business models and risk management frameworks for developing technologies.
