By Chris Matthews
Crypto boosters say New York regulations have made it a "hub for innovation and economic growth"
When New York State first unveiled its digital-asset licensing regime eight years ago, it was widely criticized by crypto boosters as an "abominable" attack on a nascent industry by regulators eager to protect the incumbent financial sector.
Dozens of crypto start-ups either cut off service to New York residents or physically moved their headquarters out of the state, rather than pay the $5,000 application fees and tens of thousands more in legal fees and manpower hours to complete the lengthy approval process.
Adrienne Harris, superintendent of the New York Department of Financial Services, said the industry is now singing a different tune about the BitLicense regime as gridlock over crypto regulation at the federal level has become the industry's main bugbear.
"The people who used to complain about the time-intensive nature of the license are now old enough to see the BitLicense as the model for how to do this well," Harris said in an interview with MarketWatch. "It's amazing how times change and circumstances change."
Industry groups like the Crypto Council for Innovation, whose members include Block (SQ), Coinbase (COIN) and venture firm Andreessen Horowitz, have been defending the New York model of late, saying in a hearing last week in Albany that the BitLicense regime is an example of "thoughtful and robust regulation [that] has made New York a leading hub for innovation and economic growth."
See also: Coinbase CEO: China sees the possibilities in crypto innovation. America must, too
One factor in the growing reputation of the BitLicense is how it looks in comparison to the situation in Washington, where Congress has been unable to come to an agreement on a crypto regulatory framework, leaving the industry at the mercy of Securities and Exchange Commission Chairman Gary Gensler, who has taken an increasingly tough stance toward it.
Harris, who formerly served in financial policy roles at the Obama Treasury Department and White House, said her team is in near-daily contact with her federal counterparts and is "hopeful there will be more clarity at the federal level" on crypto regulation soon.
But Harris isn't waiting around for Congress to straighten things out and she argued that the NYDFS approach of creating a tailored regulatory regime specifically for digital-asset companies has proven beneficial following the collapse of high-profile crypto entities like FTX, at one point the world's second-largest digital-asset exchange.
"The fact that we didn't license FTX or Voyager or Celsius proves that this model works as intended," she said. The NYDFS does not comment on pending BitLicense applications, but FTX and Voyager both announced before their collapse that they were seeking the certification.
"The framework we have here really has shown it's working, evidenced by who we haven't licensed and robust capitalization requirements that are more conservative than for traditional banks," she added. "It's really a robust model that has become the gold standard."
This approach contrasts with that of the SEC and other federal regulators, which have not engaged in crypto-targeted rulemaking and have taken steps to keep the digital asset economy separate from the traditional financial sector.
Coinbase's public tussle with the SEC over whether some of its products are being offered without the registration and disclosure necessary to comply with federal securities laws illustrates the different approaches.
The crypto industry would like the SEC to engage in specialized rulemaking that would create a custom disclosure framework that takes into account the differences between cryptocurrencies and traditional securities, and the SEC has argued that the industry is simply seeking special treatment.
Gensler said in an interview earlier this month, for instance, that crypto exchanges often act in some combination as exchanges, market makers, proprietary traders and custodians simultaneously, creating conflicts of interest that have been regulated out of existence in the traditional financial world.
Harris said Gensler's concerns are appropriate, which is why New York's rules include "strict conflict of interest, anti-fraud, anti-market manipulation rules and guidance in place to guard against the issues that those types of business models might present."
Harris points to a recent $100 million settlement with Coinbase in January after the NYDFS found that it failed to sufficiently monitor its platform to prevent money laundering and other illegal activities as an example of what a crypto-focused regulatory framework can accomplish.
"It's amazing to me how immature the sector is when it comes to anti-money laundering and cyber security, especially when compared to traditional financial services," Harris said, adding that the NYDFS prides itself in working with these companies to help them step up their efforts in combating illegal activity. Half of the $100 million will come in the form of planned investments in crime-prevention systems.
"We view this resolution as a critical step in our commitment to continuous improvement, our engagement with key regulators, and our push for greater compliance in the crypto space -- for ourselves and others," Coinbase chief legal officer Paul Grewal said after the settlement was announced in January.
Harris also won plaudits from crypto boosters following the failure of Signature Bank of New York -- which was known for banking companies in the digital asset space -- after she sought to reassure the public that the agency's decision to close the bank was not due to regulators' skepticism of the crypto industry.
"Crypto companies constituted about 20% of [Signature's] deposit base and that's roughly proportional to what we saw leaving the bank during that run," she said, though she agreed with the assessment of the Federal Deposit Insurance Corp. that there are reputational hazards to a bank associating itself with the crypto industry, especially after the liquidation of crypto-focused bank Silvergate Capital.
Read more: FDIC recommends raising deposit insurance limit for business accounts after SVB, First Republic failures
"It was that reputation that led it to be connected thematically with Silvergate, but it's not risk intrinsic to crypto that caused the bank to fail and certainly not its relationship with crypto that led regulators to take possession of it."
It's this reputational risk, Harris argued, that is evidence for why the industry should continue to embrace aggressive oversight, and why federal regulators should work to bring the industry within the regulatory perimeter.
"I think people should have more confidence in DFS-regulated entities, and I do think there's a lot more room for educating the public on that" she said. "All regulators are cognizant of the risks of overlap with crypto in the traditional financial system and that's why we have the regulations we have, and why we're eager for a federal framework as well."
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05-30-23 1336ETCopyright (c) 2023 Dow Jones & Company, Inc.