The New York Financial Regulator Targets Companies Mixing Crypto Funds

Jan 23 (Reuters) – New York’s top financial regulator is set to release new guidance on Monday mandating that companies segregate customers’ crypto assets from their own after allegedly withdrawing funds from collapsed crypto exchange FTX and its affiliated trading company Alameda Research resulted in billions in losses for customers.

The New York State Department of Financial Services (NYDFS), which runs one of the few state agencies with a regulatory regime for cryptocurrency businesses, will also require state-regulated businesses to disclose to customers how they account for customers’ digital currency.

The guidance is the latest in a series of crypto-related guidelines issued by NYDFS over the past year, which saw a market slump that wiped out roughly $1.3 trillion in crypto token value in 2022 and the bankruptcies of crypto firms like FTX triggered. Celsius Network and most recently Genesis Global Capital, whose lending unit filed for U.S. bankruptcy protection on Thursday.

It comes as federal regulators like the US Commodity Futures Trading Commission (CFTC) warn about the lack of consumer protection in the crypto sector. Federal agencies like the CFTC say much of what they can do is limited without congressional legislation that would give them additional powers.

“It’s timely, but to be honest, it was something that we had on our political roadmap even before FTX,” NYDFS superintendent Adrienne Harris said in an interview.

Federal prosecutors in Manhattan have accused FTX founder Sam Bankman-Fried of stealing billions of dollars in customer funds to offset losses at his hedge fund Alameda Research. Concerns about the transition between the two firms helped fuel a spate of customer withdrawals in November, forcing the exchange to file for bankruptcy. Bankman-Fried has denied any criminal wrongdoing and has pleaded not guilty.

Harris, who was confirmed as superintendent last year and is a former senior adviser at the US Treasury Department, has spent much of her freshman year in the role of strengthening her agency’s crypto focus. She says the virtual currency unit at NYDFS has nearly 50 employees and is working to hire more.

New York requires firms to undergo audits to ensure they comply with state requirements and meet know-your-customer, anti-money laundering, and capital requirements. Most other states do not subject crypto firms to audits.

“While I would never be so reckless as to say that no New Yorker is harmed in all this, I think it’s very fair to say that New Yorkers are better off than everyone else given the environment that we have in the country,” Harris said.

Nonetheless, the crypto meltdowns of the past year have still touched residents of the state.

New York Attorney General Letitia James earlier this month sued Celsius Network founder Alex Mashinsky, alleging he defrauded investors of billions of dollars in digital currency by concealing the ailing health of his now-bankrupt cryptocurrency lending platform.

James said Mashinsky’s alleged scam ran from 2018 to June 2022, when deposits were frozen, and more than 26,000 New Yorkers were among its victims. A lawyer for Mashinsky has denied the allegations. NYDFS did not immediately respond to a request for comment on the Celsius lawsuit.

Crypto exchange Gemini, which has a limited-purpose trust deed in New York and is allowed to serve New York residents, had partnered with now-bankrupt Genesis Global Capital to offer a crypto-yield product and give customers access to those accounts denied when Genesis suspended customer payouts in November. Gemini says Genesis owes him $900 million.

Harris says she recognizes her office can do more and says her agency is working on additional guidance on stablecoins, advertising and disclosures in crypto and consumer protection.

Crypto firm compliance with anti-money laundering rules is also “a major concern,” she said, and she expects her office to continue to focus on that in 2023.

Earlier this month, NYDFS announced a $100 million settlement with Coinbase Inc (COIN.O) for the company to comply with anti-money laundering rules. This was followed by a $30 million fine the department imposed on the crypto arm of Robinhood Markets Inc (HOOD.O) for alleged violations of anti-money laundering, cybersecurity and consumer protection regulations.

“We’ve worked really hard, not just through enforcement but through testing and just in our discussions with industry to say this is non-negotiable,” Harris said.

Reporting by Hannah Lang in Washington; Edited by Ira Iosebashvili and Diane Craft

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