Why the biggest players in crypto are worried about Adrienne Harris

On Monday morning after the third largest bank failure in US history, New York Governor Kathy Hochul hosted a press briefing to talk down a nation on the brink. The bank, Signature, was chartered in New York, but it was not Hochul who decided to take control of the collapsing institution and hand it over to the FDIC, capping the most turbulent financial weekend since 2008. After a brief introduction, Hochul relented. the stage to the woman who had choreographed the takeover: Adrienne Harris, superintendent of the New York Department of Financial Services.

With an understated assurance, Harris stood at the podium and described how her team had worked with the federal government to avert disaster. “The banks are open and ready for business this morning,” she said with the hint of a smile.

The New York DFS is an unusually powerful regulator, not only because of its seat in the world’s financial capital, but also because of its broad portfolio that extends from banking and insurance to student loan providers. In recent years, however, the department’s oversight of the roller-coaster crypto industry has put it in the spotlight and a magnifying glass, even more so than federal counterparts like the US Securities and Exchange Commission.

Unlike its DC counterparts, DFS has an additional goal: Explicit in the department’s mission is not just regulation, but economic growth. For Harris, who brought an impressive resume of government and corporate experience, the twin imperatives have meant maintaining the state’s nation-leading approach to nurturing the crypto industry while making sure the state doesn’t open the door to the next Sam Bankman-Fried.

“That’s the key with any kind of new innovation is how to promote responsible, useful innovation and protect consumers and markets from bad actors,” Harris said Fortune over a video interview. “You have difficult times and it’s not an easy thing to do as a politician, but that’s the job.”

The power of Harris and her DFS is rooted in the department’s pioneering approach to crypto regulation, which it established through its BitLicense virtual currency program in 2015. BitLicense, developed by then-Superintendent Benjamin Lawsky, established New York as the first state to create a regulatory framework around crypto— a pioneering move which, together with the willingness to grant trust charters, attracted top firms. A trust charter – a step higher than a BitLicense – gives firms trust authority.

Andrew Chang, the former COO of digital asset firm Paxos, says his company decided to move from Singapore to New York because of Lawsky’s approachable attitude. In 2015, Paxos became the first company to receive a trust charter for digital assets. “It was crazy to think he was watching [crypto] should be a thing, says Chang. “Let’s regulate it from the beginning.”

The dual offerings of BitLicenses and trust charters allowed crypto companies to conduct business in New York, from issuing stablecoins to holding virtual currencies like Bitcoin and Ether for customers. Meanwhile, federal regulators failed to establish any rules for the industry as Congress struggled to pass legislation — a vacuum that still exists. “When [DFS] saying they’re going to come in and have a conversation, they actually do, unlike what we’re seeing at the federal level,” said Kara Calvert, head of US policy at Coinbase, an early BitLicense recipient.

Facing the wrath of crypto

Harris took over as superintendent in January 2022, becoming the first black woman to lead the department. At the time, she taught as a professor at the University of Michigan’s Public Policy Center, as well as serving as a senior advisor at the business consultancy Brunswick Group.

She had spent most of her career in public service, including stints in the Treasury Department and the Obama administration, where she managed the financial services portfolio and led an interagency task force on distributed ledger technology and crypto.

Still, when Harris joined DFS, progressives worried she would be too deferential to corporate interests. Prior to joining the government, Harris was also an associate at Sullivan & Cromwell, the law firm currently handling FTX’s bankruptcy. After she left the Obama administration, she dove into the corporate world. Financial disclosure forms from 2021 reviewed by Fortune reveal that Harris sat on the boards of 10 companies and nonprofits, including controversial lending platform LendingClub and real estate startup Homie. She was an advisor to 11 others, many of them in financial technology, including the loan app Brigit.

Michele Gilliam, the policy director at the progressive nonprofit Action Center on Race and the Economy, challenged Hochul’s DFS nomination of Harris in a January 2022 op-ed for New York Daily News, which describes Harris as a “fintech booster” and cites her work with Brigit, LendingClub and Homie. In an interview with FortuneGilliam said the past year has confirmed her fears about Harris, especially as the Hochul administration feuds with labor organizations. “It certainly hasn’t changed,” Gilliam said. “She’s still been very much influenced by corporate lobbyists.” (Harris declined to comment.)

During Harris’ short tenure at the helm, DFS has been assertive in managing its broad portfolio, taking enforcement action against life insurers and providing guidance on how banks should approach the risks posed by climate change. She has shown a particularly measured approach to the crypto portfolio she inherited, even before the market’s precipitous collapse last year.

Among crypto industry insiders, there is constant criticism of DFS’s slow and laborious process of issuing BitLicenses. Thirty-three digital asset companies have a BitLicense or trust charter — FTX.US applied for a trust charter in May 2022 but was never approved — and only six companies have received a BitLicense since Harris was sworn in.

A New York-based crypto startup founder, who spoke on condition of anonymity so as not to jeopardize their position with DFS, said Fortune that they could not wait three years for approval, burning runway capital on legal fees while department staff scrutinized its financial records and business plan for potential risks. Instead of applying in New York, they are exploring offshore options, including in the Cayman Islands.

Harris says her growing crypto team, bolstered by new funding for virtual currency oversight provided by last year’s state budget, is evidence the process is improving. When she arrived, she says, the crypto team was skeletal; now it has over 50 people. Still, Harris cautions, “Speed ​​is not the yardstick,” adding, “That doesn’t mean we shouldn’t be efficient.”

Her approach to crypto enforcement actions has been more aggressive, especially in the months following November’s implosion of FTX. As Bankman-Fried’s empire fell, all eyes turned to Binance, the stateless exchange with a reputation for breaking rules. Although Binance did not have a BitLicense, it had a foothold in New York through a partnership with Paxos, which issued a Binance-branded stablecoin called BUSD that had grown to a market cap of over $20 billion. Following reports that Binance was using customer security attached to the stablecoin for its own purposes – a disturbing echo of FTX – DFS acted and ordered Paxos to end its cooperation with Binance and stop issuing the token. Changpeng Zhao, Binance’s co-founder and CEO, tweeted that given the “regulatory uncertainty in certain markets,” Binance would begin to consider its other projects.

Many in the crypto industry criticized Harris’ heavy-handedness towards Paxos since it had previously received DFS approval to issue BUSD. She defends the action: “We made responsible decisions with the stability of the market in mind.”

Burns up the economy

Nevertheless, the task of DFS is not only stability, but to drive growth. “If there’s going to be a crypto company X that exists, then you want to be the one to regulate it and have them in your state, because you have the economic development mandate,” says Matthew Homer, a former DFS deputy director focused on digital assets . He added that BitLicenses and New York trust charters have become even more valuable as Congress continues to drag its feet on crypto legislation.

For Harris, balancing DFS’s priorities has become increasingly difficult as crypto firms tighten up. Her decision in mid-March to take over Signature was a flashpoint. The bank, which served entrepreneurs in crypto, real estate and a variety of small businesses, was destabilized by a series of withdrawals from depositors. But many crypto executives saw DFS’s action as an attack on their industry, and some expressed their intention to leave New York, despite Harris’ denials that the seizure was related to the bank’s crypto business.

“Whatever DFS’s intentions were, it was taken extremely negatively by the crypto community, and that will negatively affect trust in DFS in the long term,” Austin Campbell, former chief risk officer at Paxos and adjunct professor at Columbia Business School, told Fortune at the time.

The move demonstrates Harris’ willingness to wade into controversial arenas while elevating his home state’s status. In December, she was named the banking representative for all states on the powerful Financial Stability Oversight Council, a federal organization created by the landmark Dodd-Frank banking legislation that includes such famous figures as the Treasury secretary, the Federal Reserve chairman and the SEC chair. “We’re at the table all the time,” she said Fortune.

Harris’s takeover of Signature was a display of New York’s financial power, putting DFS at the center of the banking crisis and opening Harris up to greater scrutiny. At press time, details continued to emerge about the perilous weekend that spurred her into action. Harris has defended the seizure even under fire from one of Dodd-Frank’s architects, former congressman-turned-signature board member Barney Frank, who argued the bank could have survived on its own.

Homer says that making such criticisms is part of Harris’ job. In his view, New York’s status is not in danger. He pointed to a recent BitLicense granted to social investment platform eToro in February as evidence that New York is still spurring responsible innovation, as federal regulators continue to battle over jurisdiction.

“If you’re a crypto innovator and you want to be regulated — you want this halo that comes with being regulated — you don’t have a lot of options,” Homer said. “New York is still the best option.”

This article appears in the April/May 2023 issue of Fortune with the heading “In focus: Adrienne Harris.”