State of Crypto: NYDFS Hackathon Is 'Testament' to Crypto's Growth

Crypto is growing up. Government regulators are increasingly asking for industry’s help rather than just implementing rules. A two-week-long event by NYDFS appears to be evidence of this trend.

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NYDFS’ extended hackathon

The narrative

The New York Department of Financial Services (NYDFS) wants to be better at regulating crypto companies – and it’s asking for the crypto industry’s help.

The financial regulator organized a techsprint (a sort of extended hackathon with participation by both industry and regulators) over the first two weeks of March. The NYDFS, along with the Conference of State Bank Supervisors (CSBS) and the Alliance for Innovative Regulation (AIR), invited industry participants to help it improve how it oversees regulated virtual currency businesses.

Why it matters

NYDFS is the best-known state regulator in the crypto scene, dating back to the controversial BitLicense it introduced over five years ago. Current Superintendent Linda Lacewell has spoken about updating regulations since starting her term at the agency in 2019, which capped off with a reformation of the landmark regulatory regime last year. The techsprint could be a significant step in how the regulator continues supervising the industry, drawing from industry expertise and not just its own research. It could also send a signal to other regulators and companies in the U.S., detailing one way that digital assets regulation can evolve in future.

“The purpose of the techsprint is really to help DFS become the regulator of the future,” an official familiar with the effort told CoinDesk.

Breaking it down

On Demo Day, the last day of the techsprint, teams presented their solutions to the regulator’s proposed problems, which were:

• How can DFS achieve real-time or more frequent access to company financial data from virtual currency licensees and receive early warning signs of financial risks to the companies or their customers?
• How can DFS obtain real-time transaction data from its licensees and automatically analyze the data to safeguard against illicit financing risks?
• How can DFS use tools such as natural language processing, machine learning and artificial intelligence to identify risks by processing and analyzing supervisory reports that are submitted by licensees in a wide range of formats?
• How can DFS use technology to facilitate information-sharing among licensees to help them more quickly identify and stop scams, ransomware strikes, and other criminal enterprises that put licensees and their customers at risk?

These problem statements were developed with industry input, according to the agency.

The agency official told CoinDesk that at present most regulatory reporting occurs on a quarterly basis rather than in real time. NYDFS believes it needs better access to data to properly monitor risk.

The teams, composed of both industry participants and regulatory representatives, worked on building technology solutions to these questions during the techsprint.

“There’s nothing more instructive than the government being able to speak from the perspective of industry,” Lacewell said after the presentations.

She cited recent major banks and financial firms moving into the industry, including Fidelity, Bank of New York Mellon and PayPal, in discussing why the regulator is active in the crypto space.

Chen Arad, the chief operating officer of Solidus Labs and a participant in the techsprint, said blockchain can be complex for regulators and regulations can be complex for developers if they aren’t communicating.

“I really appreciate the fact that DFS had the foresight to come up with this and they reached out to a lot of members of industry, including myself,” he said.

He noted that NYDFS has held roundtable discussions about supervising the crypto industry in the past, some of which looked at what the biggest challenges are for regulators and companies. The most effective use of data for supervision was one such challenge that was raised.

“It was a very intense two weeks but it was just so powerful to see everyone sitting around one table, including the regulators, regulated entities, legal experts, members of industry, trying to bring everyone’s expertise to these issues,” Arad said.

That the techsprint occurred at all is a signal of the evolution of the crypto industry, said Sandra Ro, the CEO of the Global Blockchain Business Council and one of the event’s judges. Other judges included Brian Behlendorf, executive director at Hyperledger; Chris Brummer, a law professor at Georgetown University (and rumored future Commodity Futures Trading Commission chair nominee); and Richard Berner, a finance professor at New York University's Stern School of Business.

Ro said it was significant that NYDFS is not only looking at how it can parse information it collects, but also how it can integrate technologies like blockchain into its supervisory process.

“I think it is a testament to how far the crypto community has come from an industry standpoint to work with regulators and legislators and various bodies, to solve for critical problems in order for the industry to grow and scale, and become mainstream within regulation and guidelines,” Ro said.

Biden’s rule

The U.S. Senate Banking Committee has advanced the nominations of Gary Gensler and Rohit Chopra out of committee, meaning the full Senate will vote whether to confirm these two individuals as Securities and Exchange Commission chair and Consumer Financial Protection Bureau director, respectively. Gensler was advanced with a vote of 14-10, while Chopra received a 12-12 vote split on party lines. As far as I know, both are expected to be confirmed.

In other regulatory news, the Office of the Comptroller of the Currency remains up for grabs. For a while it looked as if Michael Barr, a former under secretary at the U.S. Treasury Department (and onetime Ripple board member) would receive the nomination for this bank regulator role. American Banker reported last week that he has now been “all but ruled out” after pushback from progressives. University of California Irvine School of Law Professor Mehrsa Baradaran and California Department of Financial Protection and Innovation Commissioner Manny Alvarez are now rumored to be the frontrunners. Both have testified about cryptocurrencies in the past. We’ll talk more about them next week.

Changing of the guard

Elsewhere:

• US Lawmakers Introduce Bill to Clarify Crypto Regulations: Last week, a bipartisan group of lawmakers led by Rep. Patrick McHenry (R-N.C.) introduced a bill to create a working group that would evaluate the regulations around crypto, with representatives from industry, academia, investor protection groups and, notably, both the Securities and Exchange Commission and Commodity Futures Trading Commission. Also last week, Rep. Warren Davidson (R-Ohio) reintroduced his Token Taxonomy Act for a third time.
• Former US Senator Joins Binance as Policy Adviser and Government Liaison: Binance has hired former U.S. senator and ambassador to China Maxwell Baucus to help it navigate the U.S. regulatory structure. Which will probably help the exchange because less than 24 hours after announcing its new policy adviser, Bloomberg reported the Commodity Futures Trading Commission (CFTC) is investigating the exchange (though no wrongdoing was alleged).
• Beeple NFT Sold for Record-Setting $69.3M at Christie’s Auction: Posting without comment.

Outside crypto:

• What’s in Congress’ $1.9 trillion COVID bill: Checks, unemployment insurance and more (The Washington Post): The $1.9T stimulus bill (dubbed the American Rescue Plan) has been in the news for the last two months, so it’s worth taking a minute to look at what’s actually in it. In addition to $1,400 stimulus checks, the bill includes unemployment benefits, child tax credits, fiscal aid to state/local governments, school and housing assistance, health insurance assistance and funds for pensions, among other items.

If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at nik@coindesk.com or find me on Twitter @nikhileshde.

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See ya’ll next week!