Future of Finance 2024: A Conversation with NYDFS Superintendent Adrienne Harris
Adrienne A. Harris, Superintendent, New York State Department of Financial Services Moderator: Leo Schwartz, Reporter, Fortune
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00:00I do love regulation. It's true. It's an honor to be joined by you here today. So thank you so much for speaking with us. As a reporter covering the crypto industry. Your department has taken on almost mythic status for being the sole regulator in the country to actually establish a regime for regulating digital assets.
00:18But I know that your remit extends far beyond crypto to also include little areas like banking and insurance and student loans. Before we jump into that though as a New York regulator I do want to ask a very important question.
00:29And I say this with the caveat of being a Bostonian which I understand you have ties to as well. Do you think the Knicks are going to make the finals. Oh man.
00:37We're we're optimistic about our New York teams. Put it that way. Yeah. Well now that that's out of the way I do want to start with crypto because there's a number of key votes happening right now in D.C. including one today to overturn key SEC guidance.
00:54And it's created some strange political alliances where Democrats are now going against the SEC. And I know you've spent some time in D.C. advocating specifically for a stable coin bill. And I want to ask as a state regulator how you approach your role in D.C.
01:09Yeah absolutely. Well as you know I'm also a member of the FSOC. And so I spend a lot of time in D.C. and the state representative on FSOC. But because we are the only prudential regulator in the country state or federal with virtual asset specific authority we we weigh in a lot on these things.
01:25First I will say we are very eager for there to be federal legislation on cryptocurrency and unstable coins. I think the U.S. really is falling behind and we need strong frameworks in place at the national level to make sure we remain competitive and that we protect consumers because these are risky assets.
01:43We have been advocating of course that any legislation that passes on the federal level maintains a strong role for the states because as you said we've been at this now for almost a decade.
01:53We are the gold standard in crypto regulation around the world. I have foreign regulators come to me and they say we know if a company passes New York's standards it's good for us because we are the only regulator that has licensing supervision examination and then of course also enforcement authority and real rules on the books.
02:11So hopefully Congress will will pass some good legislation both on crypto and on stable coins. But that'll maintain a role for the state so that we can continue to lead in this space be nimble and make sure consumers are protected.
02:25Yeah. And I assume not everyone in this audience knows that much about stable coins which are a fairly niche but important sector of crypto. And I'm curious from your standpoint why you think stable coin legislation is so necessary and why it is an important sector.
02:39Yeah I think there's a lot of history in the U.S. if you go back a couple hundred years. So in addition to loving regulation I like history and especially financial history about the tensions between public and private currencies.
02:52And so I think it's important as this sector continues to get bigger and bigger we see more uses especially in the cross-border context in trade finance as we start to see more tokenized assets that we are keeping pace and have a framework in place for stable coins
03:07and cryptocurrency. Obviously there's monetary policy implications should the space continue to grow and get much bigger. And so it's really important that there is a federal role here.
03:19And because again I think just to be competitive we see the UAE and France and the UK and Singapore really regulating and watching these industries grow in a responsible way and watching these innovations develop in other countries.
03:33And we want that here in the U.S. as well. And you touched on this but one of the central debates around stable coin legislation is this balance between the role of the federal government and regulators and state regulators and how federal preemption will come in.
03:48Why do you think it's important to protect the rights of the states and regulation here and what role do you think states should have.
03:54Yeah well we have this in a lot of areas of financial law. I think banking is is the most well-known on where we have a dual regulatory system where both federal regulators and state regulators play a role.
04:04And we do that often what you see is there's a federal floor in terms of compliance requirements and then states are at their leisure to exceed that if they want to have different standards to protect their consumers and protect their markets.
04:15I think in this case it's particularly important because New York has been leading. We know how to do this very very well. And that's evidenced by the fact that we didn't license FTX. We didn't license Voyager. We didn't license Celsius.
04:27We just got over one billion dollars back for consumers from Gemini. We brought a hundred million dollar enforcement action against Coinbase.
04:34We're good at this. And so to take that all away so that the federal government can then just start from scratch. I think both would lead to real chaos in the industry.
04:45But also just abandons almost a decade of expertise and good work by the DFS. So from your talks in D.C. do you think a deal is nearing at least in the House for stablecoin legislation.
04:57I'm I'm very optimistic. I think there are deals to be had both in the House and in the Senate. Majority Leader Schumer has been working very hard on the Senate side. So is Senator Gillibrand Senator Lummis.
05:08So I think we will see see deals come in the near future. And then beyond stable coins what are you seeing as the main risks right now in the crypto industry.
05:17Obviously you've had the approval and rise of the Bitcoin ETFs over the past few months. Are there other sectors that you're paying attention to. Absolutely.
05:24I think from our experience the big risks that we see and it probably isn't a surprise to anybody in this audience are the BSA AML compliance of the anti money laundering and illicit finance issues.
05:34This industry really has a lot of room left to grow when it comes to AML and BSA compliance so that illicit finance those issues really are the big issues we see with our regulated cryptocurrency companies.
05:47The other issues that we see where they really struggle with compliance is on cybersecurity. And as you know DFS really is a leader when it comes to cybersecurity regulation.
05:56We published first in the nation cybersecurity regulation for financial services in 2017. We just amended the regulation last year to account for things like ransomware to do better tailoring across industries.
06:09But crypto really is an area that I think for compliance the industry still really struggles with cybersecurity and making sure their institutions and their platforms are secure.
06:20So I know we could talk about crypto all day but I do want to move on to other sectors in banking in particular. The DFS took on a national spotlight last March when you took over Signature Bank and we're now just over a year removed from that banking crisis.
06:34But I know that you've raised concerns recently over the risk exposure to commercial real estate and banks. And I'm curious how you're approaching the banking sector right now and if you do think there is continued risk of further collapses.
06:46Yeah. So I think in general the banking sector is very stable. I think the federal regulators did a wonderful job last spring when they invoked the systemic risk exception to to contain the contagion that we were starting to see across the banking sector from SVB and then to signature.
07:04So I'm grateful for them taking that action then. But there are still risks in the sector writ large. And I think a lot of regulators federal and state are watching commercial real estate very closely.
07:15I feel good about our banks here in New York. They're very well diversified. So often when people talk about commercial real estate there's obviously a lot of attention on office space especially here in New York and the vacancy rates.
07:26But commercial real estate is much more than that. It's affordable housing its market rate housing its construction loans its office its hospitality and our banks are very well diversified.
07:36They have very conservative LTVs. They know how to underwrite this asset class. So I do think it is a risk for the sector overall but regulators are doing a lot of work with institutions to make sure we're being mindful of those risks.
07:50I also think there's still some liquidity risk and the federal regulators are working to publish new rules on liquidity. But of course what we saw last spring when you see 20 percent of deposits leave an institution in four hours we've never seen something like that.
08:04And that's in part because the regulations we have around liquidity were written before a time that you could move millions of dollars from a tiny device in your hand while on the subway.
08:14And I think it speaks to the importance of having state regulators at the table because we are a little bit more nimble. And you see that with DFS and crypto cyber AI.
08:24But it's time for us to update how we think about liquidity and liquidity regulations because the technology has changed since the financial crisis when those regulations were last looked at.
08:35And how have you updated or changed the approach toward bank supervision in the wake of signature. Yeah we've done really quite a bit of work some of which was underway before signature collapse.
08:46But we wrote a comprehensive report as did other regulators about the collapse of signature and really came out with a number of very practical regulations because in my mind there's a lot you can do in the black and white of the regs.
08:58But so much of this comes down to the practice and the execution of the regs on the part of the supervisor.
09:04So we've gone back to revisit the training of our examiners and said how do we make sure our examiners have the skills they need when they need it at certain parts of their career that they have the skills that they need.
09:15We went back and we wrote a new escalation policy. So signature I think is a great example of a bank that was getting C grades in liquidity risk management for for many many years and indeed liquidity risk management is what ultimately brought down the bank.
09:30So we went back and said let's go look at the grades the camel ratings that our banks have been getting over the last five years and where we have students that are getting C's in the same subject semester after semester after semester.
09:43How do we escalate that to executive leadership and how do we memorialize that process change so that those things are coming up to the executive much sooner before those issues metastasize and we see another issue like a signature.
09:55We've also done operational stress testing with our banks. One of the things that happened with signature is the bank was really unable to give us accurate data in a timely manner and they were changing their estimates on the value of their collateral in particular very quickly.
10:08So now we're doing tabletop exercises with our institutions to to emulate a crisis event like that and make sure that they can produce accurate data to us very quickly so that we don't run into the same sort of issues again.
10:19Yeah. So it wasn't just their crypto exposure.
10:22It was not. It was not related to crypto exposure. Yes.
10:27You mentioned a before and I know this is an area that your department has been looking closely at as has the rest of the world.
10:33And I believe you've issued guidance recently on the role of discrimination specifically with insurance. So I'm curious how you're approaching a I and whether you do have any more guidance on the way.
10:44Yeah absolutely. So we just proposed guidance on insurance pricing and underwriting so not claims not customer service and applied pretty standard anti-discrimination principles.
10:55But I think added a couple more things that are particular to AI. One of those things being we're requiring outcomes testing.
11:02So it's not enough to say oh we don't think this is discriminatory. You've got to be able to test the algorithm and prove that it's no more discriminatory than insurance discriminates right as a business model.
11:13We also said third party vendor management is important here. It's not enough to say well we hired a firm we outsource. They wrote the algorithm. We don't know what's in it. Therefore it's not our fault.
11:21Third party vendor management is a well-known risk area for financial services banking and insurance. And so that that applies here too.
11:31And for this I really drew on my own experience having started an insure tech company that was based in a I and I remember doing the tour of all 50 states and having to do the geography lesson of which which is every state capital.
11:44I got some of them wrong to be sure. And but being able to explain to regulators what's in the algorithm how do we know it's not discriminatory. I've been through that exercise myself so I know it's possible.
11:56We got a lot of great comments from from industry from academics and other stakeholders on the guidance and we should have it finalized in the next couple of weeks.
12:04How do regulators stay ahead of these emergent technologies like AI where I know a lot of the action is often retroactive. How are you able to have a foot ahead.
12:12Yeah. And it's really just about talent. Right. I've long since sort of advocated. I don't think regulators should ever front run innovation. But typically what we see is that regulators lag so far behind innovation that then they have a tendency to have a knee jerk reaction when harm starts to crop up.
12:28So our goal is to shrink that timeline between when innovation is happening and when we can regulate it appropriately so that we can continue to foster responsible innovation but protect consumers and markets.
12:40What we see is when you have those transparent rules on the books you actually can really have a flourishing marketplace and still protect consumers and markets. But you can't do it without experts.
12:52So that's why we hired 60 people just in the crypto unit. It's the largest crypto regulatory unit anywhere in the world. We have AI and data governance experts on staff. Now we've got lots of technology people throughout the department.
13:06And then we rely on outside experts and stakeholder engagement as well very heavily. And I think it's it's proving to be very beneficial for us. So one more quick question.
13:16I know you've spent a lot of time in D.C. Obviously it's an election year. Do you see any future in national politics. Oh no.
13:22No. I very much like the technocratic and I love my job now. I mean as you said we get to cover insurance banking crypto. And I really have a tremendous team so I'm really honored to get to serve with them.
13:38Well we're very happy to have you in New York and thank you so much for joining us here today. Yeah.