Blockchain regulation continues to be the topic du jour, with increasing scrutiny from government agencies across the board. The latest comes from the New York State Department of Financial Services (DFS), which has been a leader in the space since the 2015 “BitLicense” framework under the New York Financial Services Law. On April 28, 2022, new DFS Superintendent Adrienne A. Harris issued fresh guidance encouraging cryptocurrency companies to adopt blockchain analytics tools as a best practice.
The purpose of the recommended analytics tools is to curb suspicious transaction activities, including money laundering and OFAC sanctions violations. DFS’s suggested new compliance controls appear to be a response to both the high background level of criminal transactions on cryptocurrency platforms and the more recent increase in Russian attempts to evade sanctions in connection with the invasion of Ukraine. As FinCEN noted, the more the U.S. and allies strengthen sanctions on the Russian Federation, the greater the incentive for oligarchs and other sanctioned individuals to spirit their assets to safe havens through difficult to trace cryptocurrency transactions.
The key takeaway is that today’s DFS compliance focus is likely to be tomorrow’s enforcement priority at the New York State Office of the Attorney General (OAG). DFS has the power to make criminal referrals to OAG, and OAG can also bring actions without a referral under New York’s blue sky laws, known as the Martin Act. OAG may seek to prosecute bad actors responsible for hosting particularly egregious money laundering and sanctions violations to promote deterrence across the cryptocurrency industry.