NY’s Gold Standard in Crypto Regulation: Shaping Federal Legislation

Federal cryptocurrency legislation may adopt a mindset similar to New York's approach. Renowned crypto regulator Ken Coghill emphasized that the world looks to New York, particularly its Department of Financial Services (NYDFS), as a standard for crypto regulation. Over the past decade, New York has established the nation's first comprehensive regulatory framework for cryptocurrencies, incorporating consumer protection, anti-money laundering measures, and cybersecurity guidelines.

The NYDFS issued its first BitLicense in 2015 to Circle Internet Financial, allowing the company to operate digital currency services within New York. Ripple Markets received the second in 2016, and both companies have since grown into major global players in cryptocurrencies and stablecoins. Currently, NYDFS oversees one of the largest clusters of crypto firms worldwide and is regarded as the benchmark for US crypto regulation.

In April, Coghill spoke at Cornell Tech’s blockchain conference about “A New Era of U.S. Innovation in Crypto.” He explained that the NYDFS sets regulatory guardrails to guide firms, most of which are crypto-native and often new to finance. He clarified that regulators are not concerned if a business risks only its own assets but are focused on transactions involving third parties. The agency's role is to establish boundaries within which firms must operate, leaving industry to innovate within those limits.

Coghill also noted that traditional financial institutions are increasingly interested in crypto, offering custody and settlement services to foster trust. Though only 22 BitLicenses have been issued, the NYDFS is prepared for more applications, especially from traditional financial firms, and devotes significant supervisory resources to crypto compared to other financial sectors.

Coghill’s experience includes working in Dubai for 12 years, where he helped develop cryptocurrency supervision models. He returned to the US to join NYDFS because of New York's influential role in crypto regulation. He described good regulation as one that facilitates activity without overly restricting it, balancing between too lenient and too strict, with recent trends leaning towards moderation.

Regarding federal activity, Coghill believes that much of the recent US crypto regulation is influenced by what New York has achieved over the past decade. The NYDFS maintains regular communication with Washington, sharing insights and influencing legislation, which has inspired reforms in other states like California.

Some industry players criticize New York’s licensing costs and strict requirements, which have led to firms like Kraken leaving the state. When asked about decentralized protocols versus traditional institutions, Coghill emphasized evaluating products based on their purpose and impact, filtering out harmful innovations.

He concluded that the future of federal crypto legislation remains uncertain, but the NYDFS continues accepting and processing applications while focusing on protecting consumers, supporting market stability, and fostering innovation.