New York financial regulators: Banks need to adopt Blockchain analysis technology to guard against encryption risks.

The New York State Department of Financial Services (NYDFS), the highest financial regulatory authority, recently issued important guidelines urging banks to expand the application of Blockchain analysis technology when handling Virtual Money-related business. This initiative marks a significant integration of traditional Financial Institutions with the Crypto Assets regulatory framework, providing the banking industry with a new approach to address digital asset risks.

Regulatory agencies promote banks to adopt new encryption risk control standards

The Financial Services Department issued an industry letter on September 17 to state-chartered banks and foreign branches operating in New York, emphasizing that Blockchain analysis tools can help Financial Institutions manage risks related to money laundering, sanctions violations, and other illegal activities more effectively. These technologies have proven effective in licensed Virtual Money companies, and now regulators want to extend the same standards to the TradFi sector.

The head of the Financial Service Department, Adrienne Harris, stated: “Banks that are directly engaged in digital asset business or interacting with clients in encryption activities should consider adopting this technology.” She pointed out that since the blockchain analysis guidelines were first issued for Virtual Money license holders in April 2022, banks' “interest and exposure to Virtual Money have increased significantly,” thus requiring similar protective measures.

Key Application Areas of Blockchain Analysis

Regulatory authorities recommend that banks apply blockchain analysis technology in the following key areas:

· Filter customer crypto assets wallet

· Verify the source of funds related to encryption

· Monitor a broader range of digital asset ecosystem activities

· Assess the risks of counterparties such as virtual asset service providers.

In addition, banks should:

· Compare expected activities with actual activities

· Conduct risk assessment based on the intelligence of the network scope.

· Conduct a comprehensive risk assessment before launching new virtual money products.

Tailored Risk Management Framework

The New York Department of Financial Services emphasizes that this application list is not exhaustive, and control measures should be tailored to the risk preferences and operational circumstances of each bank. Harris urged institutions to regularly update their compliance frameworks as markets, customers, and technologies evolve.

The notice clearly states: “Emerging technologies bring new and evolving threats that require new tools.” The report adds that Blockchain analysis can help banks protect the financial system from threats, including high-risk activities such as terrorist financing and evasion of sanctions.

It is worth noting that this guideline does not change existing state or federal laws but clearly indicates the regulatory agencies' intent—to encourage traditional banks to adopt the same risk monitoring standards that have long applied to licensed crypto companies. This initiative reflects the growing trend of integration between cryptocurrency and the traditional financial system, as well as the regulators' determination to ensure the safety of the entire financial ecosystem.

As more and more banks venture into the field of Crypto Assets, these Blockchain analysis tools will become an indispensable part of risk management, helping Financial Institutions effectively control related risks while seizing innovative opportunities.