On Monday, The New York Department of Financial Services (NYDFS) recommended that custodians segregate customer and corporate crypto assets.
Adrienne A. Harris, superintendent of the NYDFS, suggested that current guidance is a part of the state’s broader attempts to regulate cryptocurrency. She said:
“The Department of Financial Services’ virtual currency regulation has protected New Yorkers since 2015. Today’s guidance reminds DFS-regulated virtual currency companies of our expectations regarding safeguarding customer assets.”
The main recommendation advanced in today’s guidance is the segregation of crypto accounts. The organization suggests that a company’s custodian should separately manage corporate assets and virtual currencies deposited by customers.
Specifically, corporate and customer assets should be held in separate on-chain wallets, though individual customer accounts can be combined into an omnibus account. The two groups of assets should be treated separately during accounting.
Current regulation also specifies that the custodians should have limited interest in assets. Also, custodians should hold all assets solely for safekeeping and not enter a debtor-creditor relationship. However, custodians are allowed to make sub-custody arrangements with a third party and should disclose all relevant terms and conditions.
Sources reveal that the guideline explicitly protects customers if a service becomes insolvent. Further, it is also designed to prevent the chances of blending funds.
Harris briefed the media that the newly announced guideline was not explicitly motivated by the collapse of the crypto exchange FTX. The incident saw the company mismanage the funds and user deposits in conjunction with Almeda Research. She called that event “timely” but asserted that the NYDFS had planned to release guidelines on the matter for some time.
Further, she said that the NYDFS plans to release upcoming guidelines on stablecoins, advertising, and disclosures with a substantial focus on anti-money laundering rules this year.
The current guidelines apply to companies permitted to provide custody in New York, which is recognized for its strict regulatory approach towards cryptocurrencies. The registration process includes thoroughly assessing the firm’s organizational structure, the fitness of its executives, financial statements, and compliance with anti-money laundering (AML) and know-your-customer (KYC) standards to ensure substantial investors’ financial safety.
To date, only 31 firms have obtained either the state’s BitLicense or its Limited Purpose Trust Charter.