Adrienne Harris Is Crypto’s Most Powerful Regulator

[Gunnar Larson]

THE MONEY GAME MAR. 30, 2022
Crypto’s Most Powerful Regulator Is Here Adrienne Harris, New York’s
financial watchdog, has enormous sway over the industry’s future.

By Kevin T. Dugan, staff writer at Intelligencer, who covers money and
business

Photo: Victor Llorente
Thirteen years after the birth of cryptocurrency, it was supposed to be
time for Washington to rein it in. Instead, the White House punted, and the
Securities and Exchange Commission is still hashing out how it’s going to
oversee the $2 trillion industry. State watchdogs have filled that vacuum,
making Adrienne Harris, the head of the New York State Department of
Financial Services, by default the most powerful crypto regulator in the
country.

While states such as Florida and Wyoming have adopted a laissez-faire
approach to regulation, attracting a sizable chunk of the booming industry,
more money and jobs are still flowing into New York than any other city,
making it the de facto crypto capital of the U.S. “There’s a misconception
that having rigorous regulation turns off innovative companies,” Harris
tells me during an hour-long interview at her office looking out onto the
Statue of Liberty last month. “That hasn’t been our experience here.”

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Harris was tapped as the first Black woman to lead DFS last year. She came
into her position after a turn working in Silicon Valley and representing
Wall Street banks, a résumé that critics have used to paint her as too
close to the industries she is regulating. She’s eager to dispel any
criticism that she’s soft as a regulator, especially when it comes to
crypto. Harris says she’s looking to expand the agency’s remit, hire new
regulators, and possibly watch over lending and asset management in
decentralized finance, a.k.a. DeFi, one of the fastest-growing crypto
industries, which has been prone to very large hacks.

The agency’s power over the industry lies mostly with the BitLicense, a
required if unloved permit for crypto exchanges to operate within state
lines. When it was first introduced in 2014, it was meant to be a model for
the country, but the crypto industry has attacked the license for being too
strict, limiting what people can trade, and requiring expensive
anti-money-laundering operations, which, it should be noted, most
traditional financial institutions are required to maintain. For Harris,
the problem isn’t that it’s too restrictive — it’s that the process of
getting one, which has stretched years for some companies, is too slow. “If
you think about the companies that are BitLicensees, and even the companies
in the queue, having the imprimatur of ‘Have you passed regulatory muster
with a stringent regulatory regime?’ — I think the good actors see that as
a good thing,” she says.

Created in 2011, DFS has been a regulator feared more than any of its
counterparts in other states for the power it has over banks, insurance
companies, and a host of other financial institutions. It brought ambitious
money-laundering cases against banks like BNP Paribas (a settlement that
resulted in several bankers losing their jobs), fined Deutsche Bank for its
relationship with Jeffrey Epstein, and levied a $2.5 million fine on the
National Rifle Association for selling its so-called murder insurance in
the state. “DFS has a lot of teeth, and the sky’s the limit if the agency
is exercised properly,” says state Sen. John Liu of Queens, a member of the
state finance committee. “DFS compelled multinational banks to cough up $15
billion. We were able to build a couple bridges with that money. We still
have much infrastructure in the state of New York that might benefit from
DFS’s vigorous functions.”

But part of DFS’s mandate is to keep the state’s economy healthy, a
balancing act when it means protecting consumers from predatory, but also
lucrative, companies. “For me, it’s an opportunity to bring my lived
experience as a woman of color,” Harris says. So far, she has established
the agency’s first climate division, frozen fees for check-cashing
businesses that target the poor, and looked into non-bank lenders for
evidence of redlining. “It’s important to me that those voices are at the
table and being heard,” she says. “I bring a sort of pragmatism. It’s one
thing to sit in our offices with nice views and make policy, but it’s
another thing, in my mind, to really run the water through the pipes.”

In 2008, Harris joined Sullivan & Cromwell, a law firm so close with
Goldman Sachs that it has long sent its lawyers to work in-house at the
investment bank. It was there that she worked for H. Rodgin “Rodge” Cohen,
then the law firm’s chairman and the so-called trauma surgeon of Wall
Street. Cohen remembers Harris working late into the night writing
near-flawless memorandums so they’d be ready on his desk in the morning.
“She just brought what I’d call a penetrating intelligence to the problems
that were at hand,” Cohen tells me. “Many of the problems we get, you
cannot just look up the answer in a book. It’s a question of judgment and
trying to apply rules written often for other circumstances.” Still, it was
clear that corporate law wasn’t for her. “Her heart was really in public
service,” he says. From there, she went on to work for the Treasury
Department, then the Obama White House, where she focused on policies
around the then-upstart fintech industry.

After the administration turned over, Harris took a spin through the
revolving door between government and business. Her New York
financial-disclosure forms show a superabundance of work with the tech and
finance industries: She sat on the boards of six companies and nonprofits,
including LendingClub, which had recently settled with the Federal Trade
Commission over claims it had misled users on fees. She also advised 11
companies, owned two, and invested in or on behalf of two others. “I just
thought, well, if you’re going to make policy about it, you should do the
thing — run the company, build the company,” she says. “At the time, I felt
very comfortable going to a start-up because I thought, well, coming out of
government, you’re not making a ton of money. And if this start-up blows
up, I’ll probably be no worse off, financially speaking.”

It seems Harris did well enough. One real-estate tech company at which she
worked went public last summer, and Harris appears to have cashed out.
Since the disclosures were for 2020, they didn’t include her stake in
Forethought, a private A.I.-based customer-service company that announced
in December that it had attracted such investors as Harris, Ashton Kutcher,
and Gwenyth Paltrow. When I asked her about Forethought, Harris said her
investment in the company predated her time at DFS, that all her
investments are now in a blind trust, and that she would recuse herself
from any dealings with companies she has conflicts with.

So when Hochul appointed Harris to lead DFS, she was attacked by the left.
Zephyr Teachout and Cynthia Nixon both criticized Harris as being
insufficiently independent, thanks to her connections in tech and finance.
The American Prospect dug up a speech in which she characterized regulators
as looking for “no-nos” and “icky things.”

Harris has also advised the cash-advance companies Earnin, Brigit, and
SmartWage (based in South Africa), according to her disclosures. In 2019,
DFS led a multi-state investigation into the cash-advance industry over
whether they created debt traps and state banking and anti-usury laws,
since equivalent interest rates for the fees they charged would reach as
high as 469 percent. A person directly familiar with the investigation told
me that Harris’s predecessor was presented with multiple options for
furthering the investigation, including reaching a settlement, but
ultimately never made a decision. DFS wouldn’t comment.

So, of all the companies to work for, why them? “My role, when I was
working with those companies, was not to dictate price pricing or business
model. It was more to say: Here’s how regulators would view this. Here’s
why you should engage with them. Let me help you engage with them and
figure out these issues and how you can also serve customers. Less pricing
and business model, but, as an adviser who’s not in the day-to-day, helping
to sort of guide a culture and mentality,” she says.

Did she disagree with those arguing that these companies created debt traps
for consumers?

“I think it’s hard to paint with a broad brush,” she says. “I think we
should always always be careful with any new products and services, that
they are affordable and non-predatory, not creating debt traps, and that
they’re solving a real problem for consumers. And I think some do that and
some don’t.”

Last summer, after Andrew Cuomo resigned as governor, many of his
appointees went with him, including then-superintendent of DFS, Linda
Lacewell. Soon Harris’s old boss, Cohen, had recommended her to Kathryn
Wylde, the president and CEO of the Partnership for New York, a
business-advocacy group that has advised DFS. “The folks at Sullivan &
Cromwell thought that Adrienne would be a terrific candidate to field for
that job given her eight years of experience in the Obama administration
and the fact that she was somebody who understood industry,” Wylde says.
“On the theory that a regulator should know something about the industries
they’re regulating — which may be a novel concept but struck me as a valid
one — I thought she sounded like a terrific candidate.” Harris sailed
through her confirmation, with 63 senators voting for her and nine against.
“When the regulated are complaining that the regulator is being too
aggressive, that generally means the regulator is doing their job.” said
Michael Gianaris, the state senator from Queens who voted against Harris’s
nomination and, in 2019, tanked Amazon’s proposed HQ2 in New York. “Cuomo
was a prick, and the people he appointed tended to share his bare-knuckles
approach to the world. In some cases, that’s actually not a bad thing.”

While the crypto industry doesn’t appear to be getting the reprieve it had
been hoping for, other industries will surely lobby Harris to make similar
gestures toward the business community. For instance, Wylde says that
insurance companies are hoping that Harris will lower the reserves they are
required to have on hold, which they claim are higher than what’s required
by other states. “There are some long-standing issues that the industry has
that they feel that they’ve got a fresh start on with Adrienne’s
leadership,” she says.

Still, crypto is going to play a major part in how Harris’s tenure is
defined. “It’s clear that New York is doing well now and the companies that
came and started here five to ten years ago are doing well,” says Matt
Homer, a former deputy superintendent at DFS and the current
executive-in-residence at the venture-capital fund NYCA Partners. “It’s not
totally clear what the future will look like five to ten years from now.”
New York is the home base for major exchanges such as Coinbase and Gemini,
and it’s also home to shady NFT front-running scandals and alleged rapping
billionaire money launderers. That such a volatile industry could implode
and damage New York’s economy is apparent. “I understand that other states
may have gone the opposite way of the BitLicense, but there are things we
can do here in New York that will hopefully inform the federal regulators
as they continue to think about this space,” Harris said. “It’s a new world
with crypto, with DeFi, with NFTs.”

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