NYDFS Chief Says Regulators Need to Develop a ‘21st Century Framework’ for Crypto

New York’s top financial regulator believes the current approach to digital asset regulation – both at the state and federal level – is due for an update.

At a Chainalysis conference on Thursday, New York State Department of Financial Services (NYDFS) Superintendent Adrienne Harris said her agency is working to hire additional staff and update its guidance to better deal with the challenges of regulating the ever-changing crypto industry.

“Virtual assets are the first type of assets we’ve seen that are shape shifting,” Harris said. “As we watch federal regulators engage in the space, [crypto] doesn’t necessarily fit neatly into the commodities bucket or the securities bucket or the currency bucket.”

“So how do you tackle a digital asset whose definition changes based on use case? I think that’s going to require regulators to have a more 21st century framework for thinking about these things,” Harris added.

To do business in New York, crypto companies must be regulated by NYDFS, which also oversees banks and other traditional financial institutions. The agency’s regulatory standards are some of the strictest in the country, and many in the industry have criticized the agency for placing burdensome requirements on crypto startups that they say discourages businesses from setting up shop in the Empire State.

Read more: Can You Really Build a ‘Crypto Empire’ in the Empire State?

The process of obtaining NYDFS’ BitLicense, a golden ticket to operate in New York, is very difficult, sometimes taking years – and hundreds of thousands of dollars in legal fees.

Harris said improving NYDFS’ process management systems is a top priority.

“It’s no secret that the licensing and business approvals have taken too long,” Harris said. “So we’re doing a lot of work on process management to make sure that everything we do is much more efficient, faster, but without sacrificing the regulatory rigor that we need.”

Harris said the recent decision by the New York State Senate to allow NYDFS to charge crypto companies for “assessments” will boost the agency’s ability to regulate effectively. Unlike many other government agencies, NYDFS is not funded by taxpayer money, instead getting its budget from “supervisory costs” from the institutions it oversees.

“It really is a service to the industry when you can work hand in hand with your regulator and your examiner,” Harris said of the assessments. “We can help identify issues early before they metastasize … it helps us as regulators better oversee the market and protect consumers.”

Mayor Adams’ crypto dreams

New York City Mayor Eric Adams has spoken often about his ambitions of making New York the “hub” of the global crypto industry – something Harris feels passionately about, too.

“I’m a firm believer that [NYDFS] can be good for consumers, good for markets, but also cement New York’s place as the financial capital of the world, and [make it a] great place to do business, whether you’re in crypto or other areas of financial services,” Harris said.

Though Harris admitted New York’s regulations are stricter than other states, she said it has not stopped companies from setting up shop in the city.

“There’s a lot of talk when you talk to other regulators, I think most particularly in the federal government, about a ‘race to the bottom,’ that states will regulate differently, and those with lower standards are going to attract more companies,” Harris said. “But we haven’t really seen that play out in practice.”

Harris pointed out that New York-based crypto companies received about half of all venture capital investment in the space last year – double what Silicon Valley companies received and eight times higher than venture capital investments in Miami.

“Not that I’m competitive,” Harris joked.