New York's top financial regulator believes the current approach to regulating digital assets - both at the state and federal level - needs to be overhauled.
At a Chainalysis conference on Thursday, Adrienne Harris, superintendent of the New York Department of Financial Services (NYDFS), said her agency is working to hire additional staff and update its policies to better meet the challenges of regulating the ever-changing crypto industry.
"Virtual assets are the first type of assets we've seen change," Harris said. "As we watch federal regulators get involved in this area, [crypto] doesn't necessarily fit into the commodities, securities or currency bucket."
"So how do you deal with a digital asset whose definition changes depending on the use case? I think regulators need a 21st century framework to think about these things," Harris added.
To do business in New York, crypto companies must be regulated by the NYDFS, which also oversees banks and other traditional financial institutions. The agency's regulatory standards are among the strictest in the country, and many in the industry have criticized the agency for imposing burdensome requirements on crypto startups that they say discourage companies from setting up shop in the Empire State.
The process for obtaining the NYDFS BitLicense, a golden ticket to operate in New York, is very difficult and sometimes takes years - and hundreds of thousands of dollars in legal fees.
Harris said improving the NYDFS' process management systems is a top priority.
"It's no secret that the approval process for licenses and businesses takes too long," Harris said. "So we're working hard on process management to make sure everything we do is done much more efficiently and quickly without sacrificing the regulatory rigor we need."
Harris said the recent decision by the New York State Senate to allow the NYDFS to require "assessments" of crypto companies will improve the agency's ability to regulate effectively. Unlike many other government agencies, the NYDFS is not funded by taxpayer dollars, but receives its budget from the "oversight costs" of the institutions it oversees.
"It's really a service to the industry when you can work hand-in-hand with your regulator and your examiner," Harris said of the assessments. "We can help identify problems early, before they become widespread ... That helps us as regulators better monitor the market and protect consumers."
Mayor Adams' crypto dreams.
New York City Mayor Eric Adams has often spoken about his ambitions to make New York the "center" of the global crypto industry - something Harris is also passionate about.
"I strongly believe that [NYDFS] can be good for consumers and the markets, but also solidify New York's place as the financial capital of the world and make it a great place to do business, whether you're in the crypto industry or other areas of financial services," Harris said.
Although Harris admitted that regulations in New York are stricter than in other states, she said that has not deterred companies from setting up shop in the city.
"In conversations with other regulators, especially at the federal level, there's a lot of talk about a 'race to the bottom,' that states regulate differently and states with lower standards will attract more businesses," Harris said. "But we have yet to see how that plays out in practice.
Harris pointed out that New York-based crypto companies received about half of all venture capital investment in the field last year - twice as much as Silicon Valley companies and eight times as much as Miami venture capital investment.
"Not that I'm competitive," Harris joked.