NYDFS Recommends Blockchain Analytics Tools to Banks Involved With Virtual Currencies

Banking institutions that aim to get involved in activities related to virtual currencies should consider adopting blockchain analytics tools for additional risk management capabilities, New York State Department of Financial Services Superintendent Adrienne A. Harris said Wednesday (Sept. 17).

Blockchain analytics tools can enhance banking institutions’ compliance programs and prevent illegal activities, Harris said in a press release announcing new guidance on the use of the tools by New York State-regulated banking organizations that are considering or already conducting virtual currency-related activities.

According to the release, blockchain analytics can be used to assess risk exposure through customer wallet screening and funds verification involving virtual asset service providers; conduct holistic monitoring for illicit activity exposure and risk management of third parties; augment due diligence controls to evaluate expected versus actual activity of customers engaged in virtual currency activity; and weigh the risks associated with virtual currency products or services.

“As traditional banking institutions expand into virtual currency activities, their compliance functions must adapt, onboarding new tools and technologies to mitigate new and different risks,” Harris said in the release.

The release said this guidance for banking institutions builds upon guidance that was issued to New York State-regulated virtual currency entities in April 2022.

In that guidance, Harris established the use of blockchain analytics tools as a best practice for these entities to prevent and manage financial risks and suspicious activities.

Blockchain analytics has made it easy to conduct transaction monitoring and determine whether a transaction came from, for example, a regulated institution or a darknet market, Caitlin Barnett, director of regulation and compliance at Chainalysis, told PYMNTS in an interview posted in November 2022.

“I remember the first time I saw blockchain analytics,” Barnett said. “I saw that we were getting very clear information that funds were either coming from an OK source or a risky source. We were seeing very clearly if we were getting funds from a darknet market or if a customer was sending funds to a darknet market.”

PYMNTS reported in April that Washington’s evolving regulatory stance is poised to potentially reshape how banks and custodians engage with digital assets.