The head of New York’s financial services regulator wants the state’s regime for digital assets to be applied nationally, saying that it has worked to protect New Yorkers from the ongoing collapse of FTX.
Adrienne Harris, superintendent for the New York State Department of Financial Services (NYSDFS), made the comments while speaking at the Brookings Institute’s “Digital asset regulation: The state perspective” event on Tuesday.
New York has implemented several regulatory initiatives to accommodate digital assets and related products and has given authority over the industry in New York to the NYSDFS. Chief among these is BitLicense, introduced in 2014 and functions as a license for any company that intends to offer digital asset services in New York or to New York residents. Digital asset companies can also choose to pursue a limited purpose trust charter under the New York Banking Law.
“We would like for there to be a framework nationally that looks like what New York has, because I think it’s proving itself to be a very robust and sustainable regime,” said Harris on Tuesday. “We’ve seen how it’s protected New Yorkers given the calamity in the market.”
That calamity could, unfortunately, refer to many things, but in this case refers to the collapse of FTX, which has left potentially millions of customers out of pocket and continues to spill over into the rest of the industry. That collapse was spurred by the revelation that FTX’s supposed liquidity was made up of its own valueless FTT tokens, which led to a liquidity crunch on the platform and ultimately revealed that the company had been gambling with over half the client funds it was supposedly holding.
FTX had a pending application for a license in New York (something coyly confirmed by Harris onstage), but it was never approved. In order to pass the licensing tests, FTX would have needed to submit to background checks, pass assessments on the suitability of the CEO and board, prove that it has an effective KYC/AML regime in place, and most importantly, submit to an NYSDFS assessment of its financial integrity including its assets and liabilities, leverage, liquidity, and more. What’s more, any company granted a BitLicense enters into a supervisory agreement with NYDFS and must seek approval from the regulator if, for example, it wishes to offer a new product.
In other words, given what we now know about FTX, it had no hope in hell of ever being approved for a BitLicense in New York. In theory, that means that New Yorkers were, on average, more insulated from the ongoing FTX implosion than they might otherwise have been.
Harris’ comments come at the same time that the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) are engaging in a turf war over which regulator should have primacy over digital asset regulation: under the CFTC’s commodity remit or under the SEC’s securities remit, which ongoing litigation over what does or does not amount to a security has shown accounts for a significant grey area.
But what Harris is advocating for would sidestep that question entirely: New York’s regime is rare in that it gives the NYSDFS authority over digital assets as a distinct category of assets, regardless of whether they can be argued to be securities or commodities. Practically, this would remove the kind of ambiguity being used by Ripple and other SEC targets to avoid adhering to the laws that are ultimately designed to protect investors.
The NYSDFS regime attracted some early criticism, particularly due to a growing backlog of applications partly caused by the exit of then-head Benjamin Lawsky, who had architected the rules.
Harris acknowledged the criticism but also pointed out that the NYSDFS has grown fast in the past year. She said that the regulator’s ‘crypto’ unit had expanded from just three people to more than 50 in a little over 11 months, and she was likely to go back to Congress for even more funding next year.
“If you think about the return on investment, this year we’ve returned about $130,000,000 to New Yorkers in the form of restitution: not penalties (we’ve done lots of those too). That’s through our complaints hotline and through enforcement actions that had as part of their restitution to consumers.”
Those numbers will certainly be of interest to the former FTX customers who have lost their life savings on the platform.
“The more regulation in the space, the better,” said Harris.
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