NY comptroller criticizes regulator's crypto oversight prowess

As the crypto industry awaits a pivotal decision from an often adversarial national regulator, New York state's own Department of Financial Services is facing criticism of its approach to policing the asset class.

A report released in January by the office of the state's comptroller, Thomas DiNapoli, questioned the thoroughness and efficacy of New York's so-called BitLicense program.

Since 2015, New York has required any digital asset providers operating in the state to obtain a license and submit to ongoing scrutiny by the local financial regulator.

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Under Adrienne Harris, DFS has emphasized that it is paying close attention to any companies engaging in activities related to the asset class, including banks.

Companies including Paxos Trust Co., Robinhood and Coinbase Global Inc. have run afoul of the Harris regime, infractions for which the penalties ranged from an outright ban on certain operations to hefty fines. 

Still, the comptroller's office found that "there is limited assurance that DFS is adequately performing its oversight responsibilities" related to the BitLicense program. 

These perceived deficiencies in oversight posed a risk that licenses could be granted to applicants lacking the requisite financial stability or cybersecurity standards, the audit team wrote in a statement accompanying the report.

In one instance, the comptroller's office identified a lag of four years between the time an applicant submitted required anti-money laundering risk assessments and the granting of the BitLicense. This gap created a "possibility that outdated information could be used" to approve applications, the report said.

The report also questioned the cybersecurity credentials of existing licensees. The digital asset industry is notoriously prone to theft and scams, with about $1.7 billion lost to hackers last year. 

In November, DFS updated the cybersecurity standards for all the entities under its regulatory purview.

The comptroller's report called for DFS to address the documented issues and to "continue to develop and implement policies and procedures to ensure safety and soundness examinations are conducted in a timely manner."

A DFS spokesperson said in a statement that Harris, the head of the regulator, has been working to address issues since taking the helm. She hired new management, increased staff and overhauled policies for the virtual currency unit, the agency said. DFS also said its remediation efforts had dealt with the issues raised by the comptroller. The regulator also called "unwarranted" the report's comment about there being a lack of assurance on oversight of the BitLicense program.