NYDFS Upgrades Its Crypto Fraud Detection Arsenal

New York’s financial watchdog is continuing its crypto crackdown with new fraud detection tools.

The state’s Department of Financial Services (NYDFS) announced Tuesday (Feb. 21) it had developed a new enhancement to help it spot insider trading, market manipulation and front-running in digital asset trading.

“This is a significant step in our supervision of the virtual currency industry as it continues to quickly transform and mature,” NYDFS Superintendent Adrienne A. Harris said in the release. “These tools will help us combat financial crime and fraud, hold regulated entities accountable, and further strengthen our national leadership in virtual currency supervision.”

The announcement follows a busy few weeks for the NYDFS, one of the country’s most powerful financial regulators.

Late last month, the department updated its regulations that protect consumers from insolvencies at digital asset firms.

Included in these updates are provisions to make sure companies segregate customer crypto assets from their own. It came in the wake of the FTX collapse, a seismic change to the crypto sector caused in part by the co-mingling of customer funds.

And this month brought reports that the NYDFS and the U.S. Securities and Exchange Commission accused blockchain firm Paxos of failing to conduct periodic risk assessments nor perform due diligence on its customers holding stablecoins.

As PYMNTS wrote last week, the rules the crypto industry are being asked to follow are not new “and it is becoming apparent that crypto businesses hoping to continue to operate within the U.S. need to beef up their legal and compliance teams in order to rebuild trust.”

That’s particularly true, PYMNTS noted, if these businesses want to enjoy the confidence of the banking sector, which has grown uneasy by the government’s regulatory crackdown and the crypto industry’s poor track record of companies staying afloat.

NYDFS is considered among the country’s most formidable and respected regulators of virtual currency in the country.

“Its head controls New York’s BitLicense, which has long been seen as both the gold standard in the regulation of cryptocurrency businesses in the U.S. and a regime so tough that many perfectly legitimate companies fled the state — and won’t do business with New Yorkers,” PYMNTS wrote recently.

Nonetheless, the department’s reputation also gives those that have stayed in New York significant credibility within the traditional financial community.

Its scope doesn’t just end with cryptocurrency. Last month, Harris announced her department was updating regulations and methodologies for check cashing fees.