New York regulator urges banks to use blockchain to combat crypto risks

New York's top financial regulator is recommending that banks expand their use of blockchain analytics technology when handling cryptocurrencies. In a September 17 industry letter to New York-chartered banks and foreign branches operating in New York, the regulator noted that such tools could help institutions better manage risks associated with money laundering, sanctions violations, and other illicit activities. Financial Services Director Adrienne Harris said the technology has proven effective for licensed cryptocurrency firms and should also be considered by banks that engage directly in digital asset business or have exposure to crypto activity through clients. The department initially issued guidance on blockchain analysis for firms holding state cryptocurrency licenses in April 2022. Harris said that since then, banks have demonstrated "growing interest in and exposure to cryptocurrencies" and therefore need to implement similar safeguards. Regulators recommend that banks use blockchain analysis techniques to screen customer wallets, verify the source of crypto-related funds, monitor activity across the digital asset ecosystem, and evaluate counterparties such as digital asset service providers.

Regulators also encouraged banks to compare expected activity with actual activity, use network-wide intelligence to conduct risk assessments, and weigh the risks of launching new cryptocurrency products.

The department stressed that these application examples are not an exhaustive list and that controls should be tailored to each bank's risk appetite and operational characteristics.

Harris urged institutions to regularly update their compliance frameworks as markets, customers, and technologies evolve.

The notice states:"Emerging technologies present new and evolving threats that require new tools to address them."

The notice adds that blockchain analytics technology can help banks protect the financial system from threats such as terrorist financing and sanctions evasion.

The guidance does not change existing state or federal law, but highlights that regulators are pushing traditional banks to adopt the same risk monitoring standards that have long applied to licensed crypto companies.