On April 28, the New York Department of Financial Services (NYDFS) provided a “Virtual Currency Guidance” update. The guidance is directed towards all virtual currency businesses licensed under 23 NYCRR Part 200 (the New York BitLicense) or limited purpose trust companies chartered under the New York Banking Law (collectively, “VC Entities”).” The guidance mandates VC Entities to employ blockchain analytics to design and implement effective BSA/AML policies, processes, and procedures, including, for example, those relating to customer due diligence, transaction monitoring, and sanctions screening.
The Guidance addressed five key compliance concepts and issues:
Compliance in a virtual currency context should leverage the unique features of blockchain technology. Virtual currencies can be transferred from one individual or entity to another pseudonymously and without relying on a regulated third party. But, at the same time, each and every transaction is immutability recorded on the public blockchain ledger. VC Entities should incorporate this information into their risk assessment and customer due diligence programs to create a more comprehensive view of a given customer’s wallet’s activity and source of funds. VC entities should also note and account for the different types of virtual currencies and effectively address the specific characteristics of any particular virtual currency involved.
Blockchain analytical tools should be included in a VC Entity’s suite of controls. The guidance “emphasizes” the importance of using blockchain analytics tools to enhance existing BSA/AML and OFAC-related compliance controls in three key areas: (1) augmenting Know Your Customer (“KYC”)-related controls, (2) conducting transaction monitoring of on-chain activity, and (3) conducting sanctions screening of on-chain activity. VC Entities without the internal resources to implement these controls should be looking to experienced…
