Adrienne Harris, superintendent of the New York Financial Services Department, during a hearing of the Senate Banking, Housing and Urban Affairs Committee in Washington, DC, American, Thursday, May 18, 2023. Two committee senators declared that they found faults in the surveillance revisions of regulators before some of the recent bank failures and that the president asked for an independent investigator. Photographer: Al Drago / Bloomberg
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The New York Financial Services Department issued advice Last Wednesday, forcing banks to engage in cryptocurrency activities to use blockchain analysis tools, extending expectations for the first time for cryptographic companies three years ago to traditional financial institutions.
The directive applies to all banking organizations regulated by the State, including the branches of foreign banks, marking a moment of the watershed in the way regulators address the surveillance of digital assets. What started as a specialized compliance for virtual currency startups is now a basic supervision for any bank affecting cryptographic markets.
What the blockchain analysis does
The blockchain analysis refers to software that monitors, traces and assesses activity on public blockchains. The tools project customer portfolios, check the sources of funds, detect illicit flows such as money laundering or escape sanctions and compare customer behavior with risk profiles.
NYDFS Superintendent, Adrienne Harris, clearly indicated the regulatory logic: “While traditional banking institutions are developing in virtual currency activities, their compliance functions must adapt, to integrate new tools and technologies to mitigate new and different risks.”
The September guidelines have identified concrete use cases where banks should deploy the blockchain analysis:
- Portfolio screening to assess exposure to high -risk virtual asset service providers
- Holistic surveillance of exposure to illicit activities, including the risk of third -party transaction
- Reasonable diligence improved by comparing the expected customer activity compared to actual customers
- Risk assessments for new cryptographic products before the launch of the market
The list is not exhaustive. The NYDFS stressed that banks must adapt controls to their commercial models and risk appetites, and regularly reassess executives as the markets evolve.
Three years from the warning to the requirement
The regulatory arc has moved quickly. In February 2018, NYDFS warned Approved virtual currency companies concerning fraud and manipulation of the market, requiring detection of incidents and 48 -hour reports. In May 2019, the Fincen published a advisory Stressing how convertible virtual currencies allowed ransomware, money laundering and sanctions escape.
The inflection occurred in April 2022, when Harris delivered advice Demand that virtual currency companies under license in New York adopt the analysis of blockchain as best practices for the reasonable diligence of customers, monitoring of transactions and screening for sanctions. For cryptographic companies in New York, chain surveillance has become a supervision expectation.
Last week’s directives complete the circle. Any New York bank engaged in activities related to crypto must now integrate blockchain analysis into basic risk management, not as an experimental technology, but as a fundamental infrastructure.
Why New York establishes national standards
Change is important beyond state lines. New York has long been the most influential financial regulator in the country. Its Bitlidense regime, created in 2015, has established the first complete rules for digital asset companies. Its application actions have shaped the nationally compliance standards, including a penalty of $ 48.5 million against Paxos For LMA gaps and a regulation of $ 40 million with Block On Bitcoin transactions monitoring failures.
By extending the analysis requirements of blockchain to traditional banks, the NYDFS signals the Directorate of National Regulations and probably global. Fincen already considers virtual assets as vectors for ransomware and sanctions escape. For banks with New York operations, state rules often become de facto national standards.
The training effect extends internationally. Regulators in Europe and Asia are looking at how New York establishes expectations. Blockchain analysis could quickly evolve from state requirements to the global reference to compliance.
What banks must do now
Banks are faced with significant operational challenges. Blockchain analysis cannot remain corkends. He must integrate into the existing KYC, AML and suspect report infrastructure. The institutions will have the granting of licenses on intelligence platforms, to update written policies, to train compliance agents and to demonstrate deployment to regulators.
The transition raises practical questions. Banks should determine which suppliers to use, how the supervision of the blockchain surveillance teams and how to document their risk assessments for examiners. Compliance agents accustomed to traditional transactions monitoring will require training on portfolio analysis, mixers, confidentiality and other specific risks to blockchain.
Fintech and compliance sellers benefit from it. The demand for portfolio screening, sanctions controls and real -time monitoring tools will increase while banks fill the compliance gaps. Sellers offering transparent integration with inherited systems are well placed. The intelligence blockchain intelligence platforms, dominated by companies like Chainalysis, Elliptic and Trm Labs, could develop considerably.
However, change also raises questions about confidentiality, proportionality and competitive intelligence. Continuous monitoring of blockchain means that banks can follow customer transactions on several platforms and geographies. Regulators require transparency, but banks must balance surveillance with customer confidence and data protection obligations.
Following steps for compliance agents
Banks should start with an assessment of differences. Compliance teams must inventory Exhibitions for existing cryptography, whether through direct offers, customer activity or third -party relationships, and to map these risks against current monitoring capacities. This inventory determines the requirements of suppliers and implementation deadlines.
Politics updates come next. The written AML programs must explicitly approach the deployment of blockchain analysis, including the tools that will be used, how alerts will be degenerated and how the results are part of the suspicious activity reports. Nydfs awaits documented procedures, not ad hoc answers.
The training is critical. Compliance personnel must include specific -specific typologies: mixers and goblets that obscure transaction tracks, high -risk jurisdictions reported via IP addresses, wallet addresses linked to sanctioned entities or Darknet markets. Many banks will need external expertise to strengthen this capacity.
Finally, banks should establish regular examination cycles. NYDFS noted that risk managers must adapt to “the evolution of commercial models, new types of customers and new market entrants”. Blockchain analysis programs require continuous calibration as cryptographic markets are evolving and new threats are emerging.
For institutions that move decisively, Blockchain Analytics offers more than regulatory compliance. It provides competitive intelligence on emerging risks and customer behavior that traditional surveillance is lacking. For those who delay, the consequences are clear: application measures, reputation damage and loss of regulatory confidence in a market where banks supervisors are now awaiting chain visibility as a standard practice.
