New York's Crypto BitLicense Oversight Criticized by State's Comptroller

The New York Department of Financial Services (DFS) is drawing some internal heat over whether it's doing a good job overseeing crypto activity through its BitLicense program, according to a review from New York State Comptroller Thomas DiNapoli.

DiNapoli's office found that the regulator has relied on spotty, outdated and sometimes totally missing data on the backgrounds of its virtual currency license holders when considering their applications.

The audit report recommended DFS do a better job ensuring applications are complete and examinations are timely.

"For much of our audit scope period, policies and procedures were not in place to provide assurance that DFS' oversight of the application, supervision and examination of BitLicensees was appropriate," DiNapoli's office noted in the document.

However, the agency responded to the comptroller's office in September of 2023 that the problems outlined in a draft version of the report shared with DFS predate the agency's current leadership and have been addressed. The audit began in April of 2022 and extended through much of 2023.

"Over the last two years, DFS has cemented its position as the premier regulator of virtual currencies in the nation and remains committed to further strengthening its efforts," the DFS noted in a response included in the audit report. When asked for comment, an agency spokesperson referred to the rebuttal made in the document.

The comptroller's lack of confidence that the DFS is doing an adequate job "does not accurately reflect DFS’s work to address historical issues and is not supported by the findings or recommendations," the agency argued in its strongly-worded rejection of the audit's findings.

The document accused the agency – still the only U.S. regulator with a comprehensive set of rules for doing crypto business – of falling short in several areas, including missing fingerprint information, unavailable background on applicants' tax obligations, long lags between risk assessments on applicants and their eventual approvals, missing financial information and insufficient cybersecurity compliance from BitLicensees.

"DFS noted that our findings predate the tenure of the current DFS administration and that DFS self-identified many of our findings prior to the conclusion of our audit," the report said. "Several issues have not been remediated."

Another New York regulator – the state Attorney General's Office – has also questioned whether the state's financial watchdog is adequately overseeing the crypto industry. The NYAG sued a BitLicense recipient and lobbied for legislation giving it greater oversight in the past year.

Read More: Crypto World Hopeful as California Chases BitLicense in Absence of U.S. Feds

UPDATE (January 9, 2024, 22:39 UTC): Adds response from the Department of Financial Services.