New York State Department of Financial Services Provides Guidance on Virtual Currency, Makes Recommendations for Coin Listing

The New York State Department of Financial Services (NYDFS) has published “guidance” for the US digital asset industry building upon its already widely utilized Bit Licence rules. Superintendent Adrienne A. Harris issued a statement explaining her goal of prioritizing regulations for “virtual currency policy” to keep pace with digital asset innovation.

“In less than two years, we’ve built our team to over sixty experienced professionals, created and enhanced consumer and industry safeguards, and engaged with policymakers around the world – including with the U.S. Congress to help ensure there is a federal prudential regulator to supervise the industry.”

DFS said they have “shaped virtual currency policy across the nation and around the world.”

DFS explained they had added more than 60 experts to oversee licensing and strengthen supervision and supported the continued growth of the virtual currency unit.

Labeled the VOLT Initiative, the guidance provides a framework for listing crypto or de-listing coins.

In brief, the guidance aims to:

  • Heightens risk assessment standards for coin-listing policies and tailors enhanced requirements for retail consumer-facing businesses;
  • Requires licensees to develop and submit to DFS for approval a coin-delisting policy that is compliant with this proposed guidance; and
  • Updates the DFS Greenlist, the list of coins and tokens approved for all licensees to list or custody, and the Greenlist process.

The Greenlist portion of the DFS website includes the list of all regulated firms as well as currently Greenlisted coins which include various stablecoins as well as Ethereum and Bitcoin.

DFS has sent a memo to regulated firms outlining their intent to regulate and remove, halt, or curtail any cryptocurrencies from the Greenlist at any time.

As for listing a crypto, DFS says a coin issuer must have demonstrated a consistent record of safety and soundness while displaying marketplace adoption or be a stablecoin approved by DFS.

DFS highlights that under the leadership of Superintendent Harris, DFS brought its first penalties against cryptocurrency companies, including Robinhood Crypto and Coinbase, Inc. At the same time, DFS has levied over $132 million in penalties against virtual currency companies.

Casey Jennings, counsel in Seward & Kissel’s Financial Services Regulatory Group and Blockchain and Cryptocurrency Group, shared some thoughts on the DFS crypto guidance.

Jennings said that technology often outpaces regulation, and that has been true with both blockchain and Fintech businesses.

“Over the past decade, state regulators have moved faster than federal regulators, and as a result, have clawed back some of the turf they had previously lost to federal regulators. But both sets of regulators continue to dance around the 800-pound gorilla in the room – federalism. DFS’s coin listing guidance continues this trend,” Jennings stated.

He added that the guidance “vaguely” indicates that some coins may be delisted because of a pending enforcement action or perhaps a criminal case. At the same time, the guidance never “squarely addresses one of the main reasons a platform would want to de-list a coin: that the SEC believes the coin is a security, even when a state regulator may not have come to the same conclusion.”

“While DFS may have intended to clarify the regulatory responsibilities of regulated platforms, the complete inattention the guidance pays to the implication of the federal securities laws, unfortunately muddies the regulatory waters,” said Jennings.

The Guidance is accepting feedback until October 20, 2023.

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