Following a two-month public consultation period, on 15 November 2023 the New York State Department of Financial Services (NYDFS) published its new Virtual Currency Listing Guidance (the Guidance),1 in accordance with virtual currency regulation 23 NYCRR Part 200. The Guidance requires BitLicensed firms and New York-chartered limited purpose trust companies engaged in virtual currency business activity (collectively, VC Entities) to update their existing coin-listing policies and develop coin-delisting policies that are subject to formal NYDFS approval by 31 January 2024. VC Entities that fail to develop NYDFS-approved listing and delisting policies will be ineligible to self-certify2 tokens for listing in the state of New York. Further, the Guidance raises two new points with wide-ranging implications for VC Entities:
- The NYDFS may "at any time and in its sole discretion, require VC Entities to delist or otherwise limit New Yorkers' access to coins that are not included on the Greenlist3 Accordingly, the Guidance requires VC Entities to develop an acceptable coin-delisting policy that will enable the VC Entities to quickly discontinue support for high-risk coins in a manner that is consistent with safety and soundness principles and with the protection of customers and the general public.
- In an effort to introduce additional consumer protection requirements, the NYDFS additionally places new restrictions on self-certification of coins possessing certain features where such coins are made available for purchase by retail consumers.4 The restriction spans a number of common coin features, including any stablecoin that is not already included on the Greenlist, exchange coins, coins posing centralization and protocol resiliency concerns, bridged coins, coins with a limited circulating supply, and coins with anonymity-enhancing features.
Together, these two points are likely to pose material business and operational implications for VC Entities, particularly exchanges, that serve New York retail customers, limiting their ability to sell certain popular coins to New York retail customers, including high-market-cap coins like Tether (USDT), Binance Coin (BNB), and USD Coin (USDC), which are currently not represented on the NYDFS Greenlist. Notably, as part of its 18 September 2023 press release that marked the start of the consultation period for this Guidance, the NYDFS debuted a significantly amended Greenlist, reducing the number of Greenlisted coins from more than 20 to only eight.5
NYDFS-regulated VC Entities are now under tight timelines to develop new delisting policies and preview these draft coin-delisting policies with the NYDFS by 8 December 2023. Further, VC entities will need to review their existing coin-listing policies to ensure that their policies incorporate the risk assessment criteria articulated in the updated Guidance. Where VC Entities serve New York retail customers, they will also need to assess the impact of the Guidance and the updated Greenlist on their list of supported coins and update access requirements for New York retail customers. While VC Entities will have until 31 January 2024 to have their updated coin listing and delisting policies formally approved by the NYDFS, all entities must be aware that the Guidance is nonetheless effective immediately and entirely supersedes the prior 2020 NYDFS Guidance Regarding Adoption or Listing of Virtual Currencies (Prior Guidance).
What the Alert Covers
This Policy Alert (1) provides a detailed overview of the guidance and (2) details key implications and considerations for NYDFS-regulated VC Entities.
In its 15 November 2023 press release associated with the new Guidance, the NYDFS noted that the Guidance "bolsters risk assessment standards for coin-listing policies and tailors enhanced requirements for retail consumer-facing businesses."6 Further, the press release notes that the new requirement for a coin-delisting policy helps ensure that "in the event a coin must be delisted, it can be done in an orderly way that protects consumers and minimizes market disruption."7 While the NYDFS did not reveal a specific impetus for updates to its coin-listing guidance, the NYDFS acknowledged that "the market has evolved sufficiently that the Department found it prudent to further enhance the requirements of the Prior Guidance."8
This reference to market evolution may be an implicit nod to both the market frenzy of 2021 and the market contagion that occurred throughout 2022, precipitated by the May 2022 collapse of Terra, an algorithmically collateralized stablecoin that disproportionately impacted less sophisticated retail investors9 and was widely regarded as the tipping point for the "2022 crypto winter" that continues to plague the virtual currency industry in 2023. For this reason, perhaps, the Guidance focuses on preventing harm to retail investors and treats most stablecoins as coins possessing features that render them ineligible for self-certification.
The core of the Guidance imposes clear requirements on VC Entities. Specifically, the Guidance states that no VC Entity–even those VC Entities that had a previously approved coin-listing policy under the Prior Guidance–will be permitted to self-certify any coins until they update their existing coin-listing policies and receive NYDFS approval on their coin-delisting policies, consistent with the new standards established under the Guidance. The Guidance articulates the minimum attributes required of an effective coin-listing policy, inclusive of:
- Governance: The establishment of a senior Governing Authority10 at the VC Entity that oversees the approval of the coin-listing policy and review and approval (or denial) of new coin listings. Governance includes independence and avoidance of conflicts of interest by the Governing Authority as well as certain recordkeeping requirements around coin listing decisions, consistent with the seven-year recordkeeping requirements applicable to VC Entities under 23 NYCRR Part 200.
- Risk Assessment: An assessment by the VC Entity of the various technology, operational, cybersecurity, market and liquidity, illicit finance, legal, reputational, and regulatory risks posed by a given coin prior to a coin-listing determination. Embedded in the risk assessment of a coin is the need to take into consideration matters of customer protection to "ensure that all customers are treated fairly and are afforded the full protection of all applicable laws and regulations, including protection from unfair, deceptive, or abusive practices,"11 including, for instance, evaluating new coins against the risk of a rug pull.
In addition to the coin-listing requirements which are generally viewed as a "point in time" exercise by many VC Entities, the new Guidance clarifies that VC Entities are expected to maintain policies and procedures to monitor listed coins and "ensure that continued listing of the coin remains consistent with safety and soundness considerations, the protection of customers and the general public."12 These coin listing policies and procedures should include periodic re-evaluation of the risks posed by a given coin and control measures to manage those risks, as well as a coin-delisting policy governing the delisting process should ongoing monitoring or other triggers lead to a delisting decision. Further, the Guidance clarifies that the coin-delisting policy should not be a standalone document, but rather one that is supported by robust procedures comprehensively detailing the steps involved in removing support for a given coin.
The Guidance similarly articulates the minimum attributes required of an effective coin-delisting policy, inclusive of:
- Effective management governance and oversight,
- A process around coin-delisting, including clear roles and responsibilities, the chain of approval, and avoidance of conflicts of interest to prevent the risk of market manipulation and insider trading, and
- Process execution, including:
- Advance notice to customers (at least 30 days prior to delisting),
- Customer support for impacted customers (including ensuring sufficient resources to respond to customer questions and requests for sale of the delisted coin in a timely manner),
- Adequate documentation, and
- Ongoing monitoring following delisting to identify potential risk exposures.
Additionally, the Guidance stipulates that VC Entities ought to perform an impact analysis of the delisting decision to assess "second-order impacts a delisting decision might have on the VC Entity's internal business operations as well as on any counterparties and third-party service ."13 The Guidance articulates specific notice period requirements, both to the NYDFS and consumers, in the event of a delisting decision, with some carveouts for exigent circumstances.
Moreover, as highlighted above, the Guidance establishes barriers to self-certification for certain classes of coins and coins exhibiting specific features if offered to New York retail customers.
While the coin-listing requirements outlined in the Guidance are not likely to materially impact existing coin-listing policies, many of which already incorporated the above governance and risk assessment criteria, the introduction of a coin-delisting policy and process requirement, combined with a reduction in Greenlisted coins and more stringent requirements around self-certification for VC Entities serving retail users, are likely to
Key Implications and Considerations
Given that the new Guidance is effective as of 15 November 2023, NYDFS-regulated VC Entities are required to update their existing policies and processes in short order to meet the timelines established in the new Guidance. K2 Integrity is reminding all VC Entities of the following key deadlines and next steps:
- Develop a draft coin-delisting policy and meet with the NYDFS on or before 8 December 2023 to obtain NYDFS feedback on the draft coin-delisting policy, pursuant to the requirements of the NYDFS Guidance.
- Review and revise existing coin-listing policy and processes in accordance with the requirements of the Guidance to ensure appropriate process governance and coverage of risk assessment criteria, including incorporation of continuous monitoring to ensure that coin-listing is not treated merely as a point-in-time process.
- Submit final coin-delisting policy for NYDFS approval on or before 31 January 2024, pursuant to the requirements of the NYDFS Guidance, and be prepared to have a process or playbook in place to execute the coin-delisting policy requirements.
- Assess the business and operational impact of both the September 2023 NYDFS Greenlist changes and the new self-certification limitations if you serve retail customers, including assessing one's existing portfolio of supported coins and determining whether additional geofencing and monitoring controls need to be implemented to prevent sales to New York retail customers.
- Assess resourcing to ensure sufficient staffing to handle new continuous monitoring and customer support requirements pursuant to the delisting policy requirements raised in the new Guidance.
- Continue to monitor for updates to NYDFS guidance and Greenlisted coins, given that NYDFS has communicated that the Guidance is not exhaustive and may be updated from time to time.
While the new Guidance imposes additional requirements, a key theme raised throughout is how this Guidance incorporates themes from prior NYDFS-issued guidance, including the NYDFS's 2018 "Guidance on Prevention of Market Manipulation and Other Wrongful Activity,"14 and its 2022 "Guidance on Use of Blockchain Analytics."15 The Guidance therefore reiterates that the coin-listing process is one that is heavily risk-based and requires a holistic risk and control framework. And while the virtual currency industry as a whole may, at times, face criticism over a casual approach to governance and management oversight, the NYDFS continues to raise its expectations for VC Entities—requiring a carefully considered approach to coin listing that is deeply rooted in governance and process. VC Entities will therefore have to work to comply with these new requirements in short order while assessing the operational and business impact of these recent changes on their approach to coin listing and customer support going forward.
Speak to K2 Integrity representatives from the Crypto and Digital Asset Solutions practice to learn more about how K2 Integrity can support you and your firm in developing fit-for-purpose coin listing and delisting policies, as well as help you with the coin due diligence/risk assessment process itself if you are facing capacity constraints.
1 NYDFS, "Guidance Regarding Listing of Virtual Currencies" (15 November 2023), https://www.dfs.ny.gov/industry_guidance/industry_letters/il20231115_listing_virtual_currencies.
2 Self-certification is the term used by the NYDFS to describe the process whereby VC Entities decide to list a new coin, pursuant to an NYDFS-approved coin listing policy, and thereby make this newly listed coin available for approved virtual currency business activity in the state of New York or to New Yorkers.
3 NYDFS, "Guidance Regarding Listing of Virtual Currencies." The Greenlist refers to a circumscribed list of coins previously approved by the NYDFS. Unless otherwise advised by the NYDFS, VC Entities do not require prior approval to list coins included on the NYDFS Greenlist; however, entities that choose to list Greenlisted coins are required to (1) provide advance notification to the NYDFS prior to beginning support; and (2) have an NYDFS-approved coin-delisting policy. Refer to NYDFS, "General Framework for Greenlisted Coins" (18 September 2023), https://www.dfs.ny.gov/industry_guidance/industry_letters/il20230918_gen_framework_greenlisted_coins.
4 The NYDFS defines retail consumers as individuals who are not subject to any pre-qualification factors such as income or customer type (e.g., accreditation requirements). The self-certification restriction on retail consumers does not extend to VC Entities who offer institutional custody or services that are only available to business users.
5 NYDFS, "General Framework for Greenlisted Coins."
6 NYDFS, "DFS Superintendent Adrienne A. Harris Adopts New Regulatory Guidance Regarding the Listing of Virtual Currencies," Press Release, 15 November 2023, https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202311151.
8 NYDFS, "Guidance Regarding Listing of Virtual Currencies."
9 Liu, J., Makarov, I., & Schoar, A, "Anatomy of a Run: The Terra Luna Crash," National Bureau of Economic Research (April 2023), DOI: 10.3386/w31160, https://www.nber.org/papers/w31160.
10 NYDFS, "Guidance Regarding Listing of Virtual Currencies." The Guidance defines "Governing Authority" as the VC Entity's board of directors or equivalent, such as a committee formally delegated by the board of directors, that is responsible for ensuring the robustness of the governance, monitoring, and oversight framework around coin listing and delisting.
11 NYDFS, "Guidance Regarding Listing of Virtual Currencies."
14 NYDFS, "Guidance on Prevention of Market Manipulation and Other Wrongful Activity" (7 February 2018), https://www.dfs.ny.gov/industry_guidance/industry_letters/il20180207_guidance_prevention_market_manipulation_and_other_wrongful_activity.
15 NYDFS, "Guidance on Use of Blockchain Analytics" (28 April 2022), https://www.dfs.ny.gov/industry_guidance/industry_letters/il20220428_guidance_use_blockchain_analytics.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.