The New York Department of Financial Services (NYDFS) has issued a recommendation to separate custodians of customer and corporate crypto assets.
Business and customer assets may need to be managed separately
The Chief Inspector, Adrienne A. Harris, indicated that the current guidelines are part of the broader effort to eventually regulate cryptocurrencies. She said the following about this:
The Department of Financial Services’ virtual currency regulation has protected New Yorkers since 2015. Today’s guidance reminds DFS-regulated virtual currency firms of our expectations regarding safeguarding client assets.
Still, the main recommendation remains the segregation of crypto accounts. This may require crypto custodians to manage company assets and virtual currencies separately, something that is reportedly often not happening yet.
In particular, business and customer assets must be held in separate wallets, although individual customer accounts can be combined into an omnibus account. The 2 groups of assets created as a result must also be treated separately during accounting.
Also, under the current regulation, managers would also reportedly have a limited interest in assets. In addition, custodians must hold all assets solely for safekeeping and not enter into a debtor-creditor relationship. However, Custodians may enter into sub-custody arrangements with a third party and must disclose all relevant terms and conditions.
The goal is to explicitly protect customers when a service becomes insolvent, something we’ve seen more often in the past year.
However, according to Harris, the new guideline is not explicitly motivated by the collapse of the once-popular crypto exchange FTX. The incident saw the company mismanaging the funds and user deposits in conjunction with Almeda Research. She called that event awkwardly timed, but claimed the NYDFs had been planning to release guidelines for some time before that.
Guidelines for stablecoins and crypto ads
Also, the NYDFS plans to release guidelines for stablecoins and cryptocurrency related advertisements (ads).
The current guidelines apply to companies that have allowed custody in New York, which is recognized for its strict legal approach to cryptocurrencies.
The registration process for this includes thoroughly reviewing the company’s organizational structure, the suitability of its executives, financial statements, and compliance with Anti-Money Laundering (AML) and Know-Your-Customer (KYC) standards to ensure the financial security of substantial investors .
To date, only 31 companies have obtained the state’s BitLicense or limited purpose limited trust charter.