New York state loves it or leave it.
A decade ago, the state created the first comprehensive US regulatory framework for cryptocurrency businesses, including key consumer protection, anti-money laundering compliance and cybersecurity guidelines.
In September 2015, the New York Financial Services Agency (NYDFS) issued its first Bitlicense to circle internet finance, allowing the state to carry out digital currency business activities. Ripple Markets received its second Bitlicense in 2016. Circle and Ripple have become huge players in the global cryptocurrency and Stablecoin industry.
Today, NYDFS regulates one of the world's largest pools of crypto companies, and is often cited as the gold standard for US crypto regulations.
The fact that NYDFS' deputy cryptocurrency secretary Ken Kogill discussed the “new era of US innovation in crypto” at the Cornell Institute of Technology's blockchain conference on April 25th is against that background.
“Set up the guardrail”
Most of the companies that came to NYDFS for Bitlicense are crypto companies, and in many cases they are not used to the financial world and are not used to dealing with regulators. Often, they don't fully understand that they are managing someone else's assets, Coghill pointed out at a New York City meeting, adding:
If you want to start a business, if the only person you are at risk is your own business, that's not really our concern. Because you are selling something to someone else, we are there and you are in control of that product for someone else.
“We set up guardrails,” Coghill said, and it's the industry's job to find a way to stay within those guardrails. The NYDF cannot ponder all the elements that are wrong in business.
More traditional financial institutions have also been interested in crypto recently, Coghill adds. Large banks are beginning to provide crypto custody services, while other banks are beginning to provide settlement services. “The traditional (banking) model is brought into the cryptography (sphere) primarily because people feel comfortable,” Coghill said.
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Also, NYDFS has issued 22 bit science so far, but if it achieves a tide current from Tradfi companies, it appears they are ready to handle it. “On a per capita basis, we have oversight resources that focus on the crypto business more than all other (non-cryptic) businesses,” Coghill said. This includes 3,000 banks, insurance companies and other financial institutions.
Dubai's Cryptographic Regulator
This was not the direct route that took Coghill to the NYDF in July 2024. He worked for the Dubai Financial Services Authority in the Middle East for the past 12 years, eventually becoming head of innovation and technology risk oversight.
He recalled that it was “a whim” that took him to the Middle East in the first place. “I went for three years and stayed for 12 years,” he said, spending that time primarily as an official form regulating globally important banks, or G-SIBS. There he was asked to develop a cryptocurrency supervision model, and he “had spent the last six years regulating cryptocurrency in the Middle East.”
Eventually he had the opportunity to return to the United States, where he previously worked as the Manager of the Chicago Board of Directors' Options Exchange. Before that, he was an option trader. He has adopted a new mission with the NYDFS, because “the world looks to New York, the world looks to DFS.”
Panel moderator Neil DeSilva asked Coghill what good regulations look like. “A good regulation is one that does not prohibit activities, but it applies appropriate guardrails to clients that reduce risk,” he replied. The risk cannot be completely eliminated. Doing so destroys all business activities.
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He compares the regulations to a pendulum that is constantly swinging between two extremes. “The pendulum has been too far to one end of the regulations over the past few years (i.e. it's too restrictive) and is now retreating.”
How are state regulators doing recent fever-generating regulatory activities in Washington, DC at the federal level? It appears that there is a “positive tailwind” behind Cryptocurrencies and Stablecoins. said Desilva, who himself is the former chief financial officer of PayPal's digital currency and remittance business.
Pipeline to Washington
“In the case of DFS, it's mainly business, as always,” Coghill commented. That's because New York has long put in place the code rules. In fact, “many of what's happening at the federal level” is “influenced by what we've done over the past decade” at the state level.
State agencies have communicated regularly with the power of US capital over digital currencies. “We have a team that sits virtually in Washington, talking with members of Congress and talking about what we think will work and what won't work.”
NYDFS' crypto initiatives have impacted other US states. For example, the California Crypto Reform Act (AB 1934), which was signed into law in late September 2024, is based on New York Bit Resense and the limited purpose trust characteristics regulations for digital currency businesses.
https://www.youtube.com/watch?v=rkeyg7gj9em
Not all of the crypto industry is fascinated by the state's crypto licensing regime. The application fee is $5,000. It's too strict about detailed money laundering protocols and necessary audits, and the obstacles that are generally too many for innovative crypto companies. For example, when New York implemented the Bitlicense requirement, Kraken was out of the state.
Coghill was asked by Desilva how the NYDF actually views decentralized protocols, comparing how the NYDF views central financial institutions that have historically been regulated.
Coghill replied, it is important to look at the actual purpose of the product. What is the fundamental intent? Who does it serve and what is its positive and negative effects? “Aside from making a lot of money from customers, there are many innovations created for purposes,” Coghill said. “And it's mandatory for us to exclude them.”
“We're paid to see everything in a dark, dark way. It's not our job to see, 'Yes, this is great.' Rather, they look into potential products and ask, “How is this inefficient?” Or “How is this bad for inclusion?”
How does he think that things will unfold at the federal level this year with regard to Crypto and Stablecoin laws?
What will happen in the end (in Washington, DC)? who knows? I was able to find out about it six months later. I was able to find out about things next week. Things have been changing very rapidly these days.
In the meantime, “We are still embracing applications. We are still working with those applications. We are still focusing on the underlying purpose. We are protecting the market, protecting the consumer, and supporting innovation.”
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