NYDFS Issues Guidelines to Protect Crypto Customers’ Funds

The New York State Department of Financial Services (NYDFS) released regulatory guidance on Monday, ordering all crypto companies to separate funds belonging to the customers and their own. The regulatory superintendent, Adrienne Harris, highlighted that the rules focus on protecting customers' funds in case of an insolvency or similar proceeding.

NYDFS Issues Guidelines on Crypto Fund Segregation

“DFS’s virtual currency regulation has protected New Yorkers since 2015,” Harris said. “Today’s guidance reminds DFS-regulated virtual currency companies of our expectations regarding the safekeeping of customer assets.”

The official announcement highlighted four areas the new guidelines are addressing. These include the segregation and separate accounting of customer assets, clarification of custody and safekeeping services, sub-custody arrangements with third parties, and proper disclosure of general terms and conditions to the customers.

NYDFS is one of the crypto regulators with clear and stringent rules, overseeing the activities of the crypto companies within the state of New York. The new guidelines against co-mingling of funds will apply to the companies that the regulator has licensed or chartered to custody, or temporarily hold, store, or maintain virtual currency assets on behalf of their customers.

Last month, the regulator mandated the banking firms in the state to seek advance permission before they or their authorized third-party agents engage in cryptocurrency-related activities.

Check out the latest FMLS22 session on "Will Crypto Fizzle Out or Here to Stay?"

FTX Collapse Triggers the Necessity of New Rules

The new guidelines came after the collapse of Sam Bankman-Fried FTX empire. He has allegedly used FTX customer funds to issue illicit loans to sister company Alameda Research. FTX, Alameda Research, and more than 130 other affiliates are now under bankruptcy protection, while Bankman-Fried is facing criminal charges.

Though Bankman-Fried, who does not associate himself with the operations of FTX anymore, wrote in a blog that the collapsed crypto exchange should have enough funds for the customers, the bankruptcy proceedings still need to start to compensate the customers.

Last year, the crypto prices plummeted from their all-time high levels, and the two major collapses in the industry, first Terra Luna and then FTX. Both these events have triggered the collapse of several other firms that had exposure to them.