NYDFS Issues Guidelines on Segregating Customer Funds for Crypto Businesses

• The New York Department of Financial Services (NYDFS) released guidance detailing that customer assets held by a virtual currency business must be segregated.
• The four policies include segregation of and separate accounting for customer virtual currency, VCE custodian’s limited interest in and use of customer virtual currency, sub-custody arrangements and customer disclosure.
• The guidance was issued following the recent collapse of FTX and allegations directed at its co-founder, Sam Bankman-Fried, and top deputies.

The New York Department of Financial Services (NYDFS) recently released guidance detailing that customer assets held by a virtual currency business must be segregated. This guidance was issued following the collapse of FTX and allegations directed at its co-founder, Sam Bankman-Fried, and top deputies.

Adrienne Harris, the superintendent of the NYDFS, commented on the need for businesses to apply a „safe regulatory framework“ to protect customers and preserve trust. She insisted that customer funds should be segregated with separate accounting and that businesses should not commingle customer funds.

The guidance provides a summary of four different policies and standards that virtual currency entities (VCEs) should adhere to. These policies include segregation of and separate accounting for customer virtual currency, VCE custodian’s limited interest in and use of customer virtual currency, sub-custody arrangements and customer disclosure.

The regulator further said that custodians need to separately account for and segregate customer virtual currency from the corporate assets of the VCE custodian and its affiliated entities, both onchain and on the VCE custodian’s internal ledger accounts. This is to ensure that customers’ funds are not commingled with the VCE custodian’s corporate assets and that customer assets are properly safeguarded.

The NYDFS also outlined that VCE custodians must not use customer virtual currency to pay for the custodian’s own expenses or use customer virtual currency to purchase assets or engage in any other activity that is not related to the custodial services provided to the customers.

The guidance also provides guidance on customer disclosure and sub-custody arrangement. The regulator requires that all VCEs must disclose to customers the terms of the customer agreement and the customer’s rights and responsibilities. The regulator also requires that all VCEs must have a written agreement with any sub-custodian to ensure that customers’ virtual currency assets are safeguarded.

The NYDFS guidance on custodial structures is important for protecting customer funds and preserving trust in the crypto industry. It is essential that all VCEs follow the policies and standards outlined by the NYDFS in order to maintain a safe regulatory framework and ensure that customers’ funds are properly safeguarded.

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