The New York State Department of Financial Services (DFS) has issued guidance reminding all virtual currency entities licensed by New York State, including those that hold a money transmitter license, that they are required to implement measures designed to effectively detect, prevent, and respond to fraud, attempted fraud, and similar wrongdoing. In addition, DFS reminded virtual currency companies that they must be especially vigilant against efforts at market manipulation.
In the guidance issued today, DFS directed virtual currency entities to adopt measures that include, at a minimum, effective implementation of a written policy that:
- Identifies and assesses the full range of fraud-related and similar risk areas, including, as applicable, market manipulation;
- Provides effective procedures and controls to protect against identified risks;
- Allocates responsibility for monitoring risks; and
- As part of its procedures and controls to protect against identified risks, virtual currency entity must provide for the effective investigation of fraud and other wrongdoing, whether suspected or actual, including, as applicable, market manipulation.
New York is not new to cryptocurrency regulation. Since June 2015, New York has required virtual currency firms doing business there to get a “BitLicense” to hold customer funds. At the time, the thinking was that companies would want the imprimatur of a tough regulator to help win over customers who remained dubious about the product. For New York, it was seen as opportunity to get ahead of rivals around the world that were also trying to woo fintech business. Things did not work out as planned. The licensing requirement caused startups to abandon New York and, to date, only five licenses have been issued.
