New York Issues Virtual Currency Regulation Guidelines, Announces Bolstering Blockchain Analytics in Response to Russia Sanctions
On February 25, the New York State Department of Financial Services (NYDFS) released Advice to all persons and entities subject to its regulation due to the rapidly changing situation in Ukraine, following the Russian invasion and the imposition of sanctions, in particular companies engaged in virtual currency activity. Similarly, on March 2, Governor Hochul announcement additional actions to strengthen NYDFS’s enforcement of sanctions against Russia, including expedited acquisition of additional blockchain analytics technology to enhance ability to detect exposure of NYDFS-licensed virtual currency businesses to individuals, banks and other Russian entities that the Biden administration has sanctioned, which aims to build capacity to enforce anti-money laundering laws and the Bank Secrecy Act.
The NYDFS guidance reiterates that regulated entities must fully comply with U.S. sanctions against Russia, as well as federal and New York State laws and regulations, including the NYDFS virtual currency regulations set forth in 23 NYCRR 200. These guidelines provide a non-exhaustive summary of the steps regulated entities should take.
Advice on Virtual Currency Regulation
Consistent with other reports, the NYDFS believes that the Russian invasion significantly increases the risk that virtual currency transfers could be used to evade sanctions. Accordingly, all regulated entities engaged in virtual currency business activity – including, but not limited to, a BitLicensee or a limited purpose trust company – must have policies, procedures and processes tailored to protect against the unique risks that virtual currency presents, including by implementing existing federal and NYDFS guidelines for sanctions compliance. These include, but are not limited to:
NYDFS also believes that regulated entities should pay particular attention to the effectiveness of virtual currency-specific control measures, including, but not limited to, sanctions lists, geo-screening, and any other measures relevant to the specific risk profile of each entity.
The following are examples of internal controls specific to virtual currency:
- Use of geolocation tools and IP address identification and blocking capabilities to detect and prevent potential exposure to sanctions; and
- Transaction monitoring and investigation tools, including blockchain analysis tools, to identify transaction activity involving virtual currency addresses or other identifying information associated with sanctioned individuals and entities listed on the list of Specially Designated Nationals and Blocked Persons (SDN) or located in sanctioned jurisdictions.
Regulated entities should have policies, procedures and processes in place to implement the necessary internal controls, with appropriate training, risk assessments, testing and audits against their risk profile.
As economic sanctions have been imposed on Russian individuals, banks and other entities, the US Treasury Department’s Office of Foreign Assets Control (OFAC) has issued orders and directives on the implementation of these penalties. All Sanctions Orders and Directives, including SDN Listed Financial Entities, are accessible on the US Treasury website. In anticipation of frequent additions, NYDFS urges regulated entities to register on this site to receive email updates directly from the US Treasury to ensure timely implementation of any new sanctions.
The Guide reminds that U.S. persons (including, but not limited to, banks, virtual currency businesses, insurers and other financial institutions, as well as insurance producers and third-party administrators) are prohibited from conduct financial transactions with persons on the SDN list. , unless OFAC has otherwise authorized through licenses listed on the OFAC website or by obtaining a separate license for a particular transaction. Although not on the SDN list, more limited, but stricter, sanctions have been imposed on several Russian entities with respect to their ability to raise debt and equity and/or with respect to their correspondents and their transit accounts. The NYDFS echoes the fact that regulated entities should review the specific restrictions contained in the OFAC website to ensure continued compliance.
The NYDFS also stated that regulated entities “should take the following actions immediately“:
- Monitor all communications from NYDFS, US Treasury, OFAC and other federal agencies in real time to stay fully informed of the latest developments;
- Amend their transaction monitoring and screening programs to make the necessary changes to their systems to capture the new sanctions as proposed and to ensure continued compliance with all applicable laws and regulations, including Part 504 regulations of the NYDFS Superintendent;
- Monitor all transactions going through their institutions, particularly trade finance transactions and remittances, to identify and block transactions subject to OFAC sanctions and follow OFAC instructions regarding blocked funds; and
Update their OFAC compliance policies and procedures on an ongoing basis to incorporate sanctions already imposed and any new sanctions that may be imposed in the future.