New York Forces Banks to Deploy Blockchain Tools to Fight Crypto Crime

New York’s Department of Financial Services (NYDFS) has mandated that banks under its jurisdiction adopt blockchain analytics as a core component of their compliance frameworks to combat illegal financial activities associated with digital assets. The directive, issued on Sept. 17, applies to state-chartered banks and foreign branches licensed in New York, reflecting the regulator’s recognition of the growing integration of cryptocurrencies into traditional banking operations. NYDFS Superintendent Adrienne Harris emphasized the increasing exposure to digital assets through customer activity and bank-led virtual currency initiatives.

The guidance builds on prior actions taken by the NYDFS, which in April 2022 required licensed virtual currency firms to employ blockchain analytics to trace transactions and assess risk. The regulator expanded its oversight in December 2022, mandating prior approval for new or significantly different virtual currency-related activities. This latest directive extends similar expectations to traditional banks, urging them to use analytics tools for screening customer wallets, verifying fund origins, monitoring exposure to high-risk virtual asset service providers, and detecting money laundering or sanctions evasion.

NYDFS clarified that the guidance is not a formal rulemaking but rather a supervisory expectation. Institutions are advised to tailor their controls according to their risk appetite and business models, while also reassessing them regularly to adapt to changing market conditions. The regulator warned that the growing adoption of digital assets raises the potential for illicit finance, underscoring the critical role of banks in preserving the integrity of the financial ecosystem. This move aligns with New York’s broader approach as one of the most stringent crypto regulatory regimes in the U.S., complementing its established BitLicense framework.

The directive highlights a broader trend in the financial sector where traditional institutions are increasingly integrating blockchain analytics into their compliance programs. As digital assets become more embedded in financial operations, regulators worldwide are recalibrating frameworks to address the unique risks posed by decentralized technologies. For example, the European Union's Markets in Crypto-Assets (MiCA) regulation aims to standardize oversight across member states, while the U.S. Securities and Exchange Commission (SEC) continues to assert jurisdiction over most crypto tokens as securities. This evolving regulatory landscape underscores the need for banks to adopt advanced tools that can track and verify blockchain-based transactions in real time.

The use of blockchain analytics is expected to enhance banks’ ability to meet anti-money laundering (AML) and counter-terrorist financing (CTF) requirements. By leveraging tools that can trace digital currency flows and identify suspicious patterns, institutions can better align with global compliance standards and mitigate reputational risks tied to association with illicit actors. This is particularly relevant as the crypto ecosystem expands, with decentralized finance (DeFi) platforms and tokenized assets presenting new challenges for traditional compliance mechanisms.

New York’s move signals a potential shift in the competitive dynamics between traditional banks and crypto-native financial institutions. As banks increasingly adopt blockchain-based compliance tools, they may begin to close the gap with fintechs and specialized crypto banks that have long prioritized digital asset integration. Institutions that fail to adapt risk falling behind in an industry that is rapidly redefining the boundaries of financial services. At the same time, the directive reinforces the importance of regulatory clarity, as institutions navigate the complexities of integrating emerging technologies into their operations.