Crypto Scams: Updates from New York

Important news regarding crypto scam. New York’s financial regulator is setting the tone, recently updating its monitoring tools against crypto fraud. Let’s take a closer look at what has happened.

New York Financial Services Implements Crypto Fraud Controls

The New York State Department of Financial Services has strengthened its ability to detect fraud in the virtual currency industry by building on previous policies to prevent illegal activity.

Its enhanced ability to identify insider trading and market manipulation in New York State-regulated companies engaged in virtual currency activities comes at a time when the cryptocurrency industry remains under pressure following the collapse of big names such as Celsius network, Terra/LUNA and FTX.

The New York regulator has strengthened its capabilities with new tools to monitor the risk of insider trading and market manipulation.

The NYDFS will utilize technology to detect potential insider trading, market manipulation, and front-running activity related to exposure of Department-regulated entities and applicants or potential exposure to listed virtual currency wallets.

The Superintendent of the New York State Department of Financial Services, Adrienne A. Harriscommented on the matter:

“This is an important step in our oversight of the virtual currency industry as it continues to rapidly transform and mature. These tools will help us fight financial crime and fraud, hold regulated entities accountable, and further strengthen our national leadership in monitor virtual currency.”

The announcement builds on recently published guidelines for the use of blockchain analytics, criteria for USD-backed stablecoins and new guidelines related to virtual currency insolvency or similar proceedings.

What the new crypto fraud regulation includes

The new guidance applies to those entities authorized or chartered by the Department to hold, or temporarily hold, store or maintain virtual currency assets on behalf of their clients.

As custodians of the assets of others, virtual currency entities acting as custodians, including but not limited to the storage, custody or control of virtual currency on behalf of others, must have robust processes in place, similar to traditional financial service providers.

New York’s virtual currency regulations require entities to, among other things hold virtual currency in a manner that protects clients’ assets. It also requires them to keep complete books and records and to disclose the material terms and conditions relating to their products and services, including custody services.

Not only that, it also requires them to refrain from making false, misleading or deceptive statements or omissions in their marketing materials. Units operating under BitLicense and Limited Purpose Trust Charter are required to comply with these requirements through DFS inspections and investigations or, if necessary, enforcement action.

Guidance in case of crypto-insolvency: the details

In January, Adrienne A. Harris, superintendent of the New York Department of Financial Services, issued guidance to protect consumers in the event of virtual currency insolvency.

The New York regulator’s guidance reiterates the department’s expectation of proper custody and disclosure practices for licensed entities. According to the document, it is of the utmost importance that the just and beneficial interest in the asset remains with the customer at all times.

Adrienne A. Harris, NYDFS Superintendent, had stated on the subject:

“Regulation of DFS virtual currency has protected New Yorkers since 2015. Today’s guidance reminds DFS-regulated virtual currency firms of our expectations regarding safekeeping of clients’ assets.”

The new Insolvency Regulatory Guidance specifically addresses the segregation and separate accounting of client virtual currency.

This means that in order to defend the Customer’s Virtual Currency and maintain appropriate books and records, a VCE Custodian (a “virtual currency entity” acting as custodian) should separately account for and separate the customer’s virtual currency from the corporate resources of the VCE custodian and its affiliates. Both on the chain and on VCE Depository Bankits internal financial statements.