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DeFi and Credit Risk

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The existing approach to digital asset regulation – both at the state and federal levels – is ripe for an upgrade, according to New York's top financial regulator.

Superintendent Adrienne Harris of the New York State Department of Financial Services (NYDFS) said her agency is striving to employ more people and revise its advice to better deal with the problems of regulating the ever-changing crypto business at a Chainalysis conference on Thursday.

"Virtual assets are the first shape-shifting assets we've observed," Harris explained. "As we observe federal authorities interact with the market, [crypto] doesn't always fall neatly into the commodities, securities, or currency buckets."

"How do you deal with a digital asset whose meaning varies depending on the use case?" "I believe it will necessitate regulators adopting a more 21st-century paradigm for thinking about these issues," Harris continued.

Crypto firms must be regulated by the New York Department of Financial Services (NYDFS), which likewise regulates banks and other traditional financial organizations. The agency's regulatory rules are among the most stringent in the country, and many in the industry have chastised it for imposing onerous requirements on crypto firms, which they claim discourages companies from locating in New York.

Obtaining NYDFS' BitLicense, a golden ticket to operate in New York, is a lengthy process that can take years and cost hundreds of thousands of dollars in legal expenses.

The improvement of NYDFS' process management systems, according to Harris, is a high goal.

"It's no secret that licenses and company permits have taken an inordinate amount of time," Harris added. "As a result, we're working hard on process management to ensure that everything we do is considerably more efficient and faster while maintaining the regulatory rigor that we require."

The New York State Senate's recent decision to enable the NYDFS to charge crypto firms for "assessments" will, according to Harris, improve the agency's ability to regulate efficiently. Unlike many other government agencies, the NYDFS does not receive funding from taxpayers, instead relying on "supervisory costs" from the entities it regulates.

"When you can work hand in hand with your regulator and your examiner, it really is a service to the industry," Harris said of the evaluations. "We can assist spot concerns before they spread... it allows us to better regulate the market and protect consumers as regulators."

Mayor Adams' cryptocurrency fantasies

New York City Mayor Eric Adams has spoken frequently about his desire to make the city the "center" of the global crypto business, something Harris shares.

"I'm a firm believer that [NYDFS] can be beneficial for customers, markets, and [make] New York a fantastic place to do business, whether you're in crypto or other areas of financial services," Harris said.

Despite the fact that New York's rules are tighter than those in other states, Harris claims that this has not deterred businesses from locating in the city.

"When you talk to other regulators, especially in the federal government, there's a lot of talk about a 'race to the bottom,' where states will regulate differently and those with weaker requirements will attract more companies," Harris said. "However, we haven't actually seen that in practice."

According to Harris, crypto startups situated in New York earned almost half of all venture capital investment in the space last year, which is double what companies in Silicon Valley received and eight times more than venture capital investments in Miami.

Harris joked, "Not that I'm competitive."

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