Article

January Update on Crypto Regulatory Affairs 

by the Crystal compliance team

The year 2023 is already well underway. January was by no means a slow month, and we expect a trend to continue and many changes in the regulations surrounding cryptocurrencies in the coming months. In a nutshell, the New York Department of Financial Services released a new settlement and guidelines while the new wave of fraud and cybercrimes plagues the crypto world. This poses a significant challenge for the industry as it tries to maintain its credibility. European Union voted in favor of capital requirements on banks holding crypto assets; while France passed mandatory licensing for all crypto firms. 

Capital requirements on banks holding crypto assets from European Union 

On January 24, 2023, the European Parliament’s Economic and Monetary Affairs Committee voted in favor of a draft bill that imposes “prohibitive” capital requirements on banks holding crypto assets, citing the need for stricter regulations in response to the recent market turmoil.  

Due to the rapid emergence and evolution of cryptocurrencies, the increasing number of banks’ exposure to these assets has raised concerns about their potential impact on the country’s financial stability. Existing regulations do not take into account the risks associated with these assets. 

Crypto-asset exposures shall receive a risk weight of 1250% to the greater of the absolute value of the aggregate long positions and the absolute value of the aggregate short positions in the crypto-asset. Also, unbacked crypto holdings in the highest possible risk tier, placing a 2% capital limit on banks holding unbacked cryptocurrencies. 

The proposed legislation is expected to be issued in January 2025. 

New custodial guidance by the New York Department of Financial Services 

On January 23, 2023, the New York Department of Financial Services (Department or NYDFS) published the Guidance on Custodial Structures for Customer Protection in the Event of Insolvency. 

This document aims to guide the various steps a company should take to protect its customers in the event of an insolvency or similar proceeding, including a requirement for firms to keep customer funds separate. The goal is to ensure that the customers are protected from the effects of insolvency. The Department’s objective is to provide a clear and consistent framework for the standards and practices that are expected of a company when it comes to providing asset custody services.  

The guidance will help ensure that the providers of these services are providing their customers with a high level of protection. 

 Bitzlato founder charged with unlicensed money transmitting. 

On January 17, 2023, a complaint was unsealed in Brooklyn federal court against Anatoly Legkodym, a Russian national and the senior executive of Bitzlato Ltd (Bitzlato), a Hong-Kong based cryptocurrency exchange. According to the complaint, he and his company were involved in money laundering and violating various US regulations. French authorities and the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) are taking concurrent enforcement actions. 

According to court documents, Bitzlato has marketed itself as requiring minimal identification from its users, specifying that “neither selfies nor passports [are] required.” Due to the lack of proper Know-Your-Customer (KYC) procedures on Bitzlato, it was allegedly used by criminal organizations to fund their activities. One of the company’s main customers was Hydra Market, an online marketplace that was known for its illegal activities. It was also one of the world’s largest darknet platforms. Before Hydra Market was shut down by German and US authorities in April 2022, its users had been exchanging over $700 million in digital currency with Bitzlato. Bitzlato also received more than $15 million in ransomware proceeds. 

On January 20, 2023 Crystal’s investigation team shared a full analysis on the Bitzlato case.  

Mandatory crypto licensing regime announced by French parliament 

On January 17, 2023, in response to concerns about the potential impact of cryptocurrencies on the country’s financial stability, the French Parliament approved an amendment to the regulations regarding the registration of digital asset service providers. The approval of the amendment will require crypto firms to obtain the necessary licenses.   

This proposal aimed to support the crypto industry’s growth and not hinder it.  

It was highlighted that the amendment would allow crypto firms to operate without requiring them to have a higher-level license. Instead, they should register with the country’s financial markets authority and follow the Markets in Crypto-Assets (MiCA) regulation. Some of the requirements that crypto firms must follow include segregating funds, reporting to regulators, and having a proper governance structure. The companies that have already taken the necessary steps to comply with the AML guidelines will be able to continue operations until 2026 when the MiCA laws are implemented. 

$100 million settlement between Coinbase and New York regulators 

On January 4, 2023, the New York Department of Financial Services (Department or NYDFS) announced a $100 million settlement with Coinbase Global Inc., the largest US cryptocurrency exchange (Coinbase) for failures in its compliance program. The agency claimed that the exchange was vulnerable to criminal activities. 

As part of the settlement, the company was required to pay a fine of $50 million. It was also ordered to improve its compliance program over the next two years. The department mentioned that Coinbase violated the New York Banking Law and the New York State Department of Financial Services’ law, virtual currency, money transmitter, transaction monitoring, and cybersecurity regulations.  

Since 2017, Coinbase has been operating as a licensed money transmitting and virtual currency exchange in New York. Following an investigation and examination, the Department of Financial Services found that the company’s anti-money laundering and bank secrecy program was not sufficiently designed to address the needs of its customers. The agency also found that the company’s multiple systems and processes were not designed to monitor and report its activities effectively.   

Our Regulatory & Compliance team at Crystal Blockchain includes experts from financial services and regulators. We are hands-on professionals with experience in helping you to transform regulation into effective risk management. For any compliance-related questions please get in touch with us at: compliance@crystalblockchain.com