The New York State Department of Financial Services (NYDFS) is tackling a significant regulatory issue: how cryptocurrency exchanges like Coinbase, Gemini, and others list — and maybe more significantly, delist — tokens. A new PSA claims that the appeal to amend the agency’s guidance builds upon and aims to formalize current operating standards.
Although the action could have national and possibly international repercussions, it goes well beyond incremental government reform.
The analysis of today’s announcements by my colleague Jack Schickler is excellent. The agency’s stated goals were to update the list of “greenlisted” coins (currently limited to bitcoin, ether, and stablecoins from PayPal and Gemini), set policy so that NYDFS licensees are more proactive in assessing legal, reputational, and market risks during the coin listing process, and open a public comment period so that industry participants could voice their opinions.
Even though the NYDFS is “just” a state financial regulator, its actions can have an impact on the entire world. Since New York continues to be a major center of economic activity and capital formation, even in a more globally interconnected world, the agency is a pioneer in establishing reporting and communication standards that are adopted by the whole financial sector. Anywhere you go, you can succeed if you can succeed here.
Similarly, despite The Blockchain’s globalized character (some could say “geographical decentralization,” but you don’t have to), cryptocurrency is similar in an intriguing way. Consider only the NYDFS’s track record for bringing regulatory enforcements: a couple of these cases have genuinely changed the sector, including the Tether case that raised the bar for stablecoin transparency.
Yes, the so-called BitLicense issued by the agency didn’t quite achieve what its creator, attorney and former public servant Benjamin Lawsky, had envisioned for crypto supervision. However, the compiled set of guidelines, advice, and rules has had a significant impact on the growth of the digital asset market in the United States. Many insiders believe it set the stage for regulators to attempt to fit cryptocurrency into the pre-existing framework of regulations rather than deal directly with the unique characteristics of cryptocurrency.
Certainly, its legacy is complicated. It’s debatable whether the NYDFS has shielded New Yorkers from the myriad cryptocurrency-related business failures and bankruptcies that have occurred over the years, particularly during the painful year of 2022 when now-defunct crypto lenders like Celsius and BlockFi collapsed. Numerous individuals who were drawn in by the (now clear) unsustainable interest rates and are now grateful they are not bankruptcy estate creditors. These businesses were prohibited from providing services in the state.
However, the extremely restrictive Bitlicense system hasn’t always been profitable (even if we ignore the potential profits Celsius users might have seen riding the bubble up). Licensees like Xapo, bitFlyer, and the US division of Bitstamp are exchanges that aren’t particularly well-known for having a significant presence in the New York or American cryptocurrency trading marketplaces.
Even worse, it doesn’t even have a 100% success rate in safeguarding both businesses and consumers, despite the fact that only 30-plus companies have BitLicenses. For example, the now-defunct Genesis Global Trading division of CoinDesk sibling business Genesis functioned under the auspices of New York State with what appeared to be no useful advantage.
In either case, trying to determine if rules are “worth the cost” is pointless. Particularly in the area of cryptocurrencies, where all significant use cases are essentially uncontrollable and all the excitement occurs outside of gated gardens like Coinbase and Gemini. It has taken four years for mass market crypto to emerge, and only bull markets make centralized retail crypto lending, crypto credit cards, etc. seem like a reasonable idea.
The new announcement from the NYDFS may have an international impact because it deals with whitelisting and blacklisting of tokens and because cryptocurrency trading is a worldwide phenomena. In the big picture of token values, it doesn’t really matter if one custody business or another receives a BitLicense, but it does matter if Coinbase will list or delist a token (even if the “Coinbase bump” is muted today).
When it comes to delisting tokens, the agency appears to be particularly concerned with market stability. The notice from NYDFS Superintendent Adrienne Harris emphasized that occasionally tokens will fall through the cracks or undergo changes, and if they were originally deemed “OK” to list, they must now be taken off the list without further harming customers.
That strikes as difficult, if not impossible. This is not because crypto companies are refusing to comply or because regulators are inept. Just in terms of market structure, anything that is both widely dispersed and illiquid (like a cryptocurrency) will be subject to price peaks. Since the value of a token is inextricably linked to its reputation, it is difficult to conceive a scenario in which Coinbase’s requirement to delist a particular token would not be seen as its temporary demise.
Changes to the way businesses “self certify” the tokens they list could also prevent bad actors from entering the market altogether, but it’s difficult to see how The Compliant will be able to act quickly enough to delist tokens that are actually a problem when it comes to forming regulatory working groups and delisting coins with “Department-identified weaknesses or vulnerabilities.”
This is particularly true because delisting a token involves a number of legal requirements, including making a notification and providing the public enough time to respond.
Changes to the way businesses “self certify” the tokens they list could also prevent bad actors from entering the market altogether, but it’s difficult to see how The Compliant will be able to act quickly enough to delist tokens that are actually a problem when it comes to forming regulatory working groups and delisting coins with “Department-identified weaknesses or vulnerabilities.”
This is especially true because delisting a token involves a number of actions that must be followed in order to remain overboard, such as making a notice and providing the public the time to respond.
Consider BALD, a recent pump and dump token that served as the launch token for Coinbase’s L2 network. It was released on a Sunday, reached a market valuation of almost $50 million by evening, and then burst the following Monday. How could a regulator foresee such a thing?
The plain truth is that they’re not even going to attempt; instead, they’re restricting their authority to monitoring a purported “greenlist” of pre-approved tokens rather than actively attacking the on-chain tokens that appear and have the potential to cause harm.
The listing and delisting processes are getting longer, yet this doesn’t truly help customers. These regulations will most likely result in domestic bucket shops like Coinbase continuing to lose market share to foreign bucket shops like Binance.
Just seems like the goals of rules don’t appear to line up with the realities of cryptocurrency trading, at least in this very limited sense. And that good intentions don’t always translate into sound policy.
