NYDFS Releases Guidance on Importance of Segregation and Separate Accounting for Customer Funds in Crypto Industry

On Monday, the New York Department of Financial Services (NYDFS) published guidance on custodial structures to help protect customers’ money if a crypto firm goes bankrupt. New York’s top financial regulator stressed that businesses should not commingle customer funds and that customer funds should be segregated with separate accounting.

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) released guidance detailing that customer assets held by a virtual currency business must be segregated.

The guidance was issued by Adrienne Harris, the superintendent of the NYDFS, and the regulator insists that virtual currency custodians need to apply a “safe regulatory framework” to protect customers and preserve trust. The NYDFS guidance provides a summary of four different policies and standards that virtual currency entities (VCEs) should adhere to. The four policies are as follows:

• 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.

“To custody customer virtual currency properly and maintain appropriate books and records, a VCE custodian is expected 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,” the New York regulator details.

The regulator further said that custodians should have limited interest in customer funds and in the use of a client’s virtual assets. “When a customer transfers possession of an asset to a VCE custodian for the purposes of safekeeping, the department expects that the VCE custodian will take possession only for the limited purpose of carrying out custody and safekeeping services,” the NYDFS guidance explains.

What are your thoughts on the NYDFS’s guidance on custodial structures for customer protection in the event of a crypto firm’s insolvency? Share your thoughts about this subject in the comments section below.