NEW financial regulator upgrades surveillance tools against crypto fraud

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

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

“Tools will help us fight financial crime and fraud”

The New York regulator has stepped up its capabilities with new insider trading and market manipulation risk monitoring tools. NYDFS will utilize the technology to detect potential insider trading, market manipulation, and front-running activity related to Department regulated entities’ and applicants’ exposure or potential exposure to listed virtual currency wallet addresses.

Superintendent of the New York State Department of Financial Services, Adrienne A. Harris, commented, “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 virtual currency oversight.”

The announcement builds on recently released guidance regarding the use of blockchain analytics, criteria for USD-backed stablecoins and new guidance regarding virtual currency insolvency or similar proceedings.

The guidance applies to those entities that the department has licensed or chartered to keep, or temporarily hold, store or maintain virtual currency assets on behalf of its customers.

As custodians of the assets of others, virtual currency entities acting as custodians, including without limitation, storing, holding or controlling virtual currency on behalf of others, must have robust processes in place, similar to traditional financial service providers.

New York’s virtual currency regulation requires entities to, among other things:

• hold virtual currency in a manner that protects the customer’s assets;
• maintain comprehensive books and records; disclose the material terms and conditions relating to their products and services, including custody services;
• and refrain from making false, misleading or deceptive representations or omissions in their marketing materials.

Entities operating under the BitLicense and Limited Purpose Trust Charter are held to these requirements through DFS oversight and investigations, or when necessary, enforcement actions.