NYDFS Advises Crypto Account Segregation

NYDFS Advises Crypto Account Segregation

The New York Department of Financial Services (NYDFS) recommended the January 23 that custodians should segregate crypto assets from customers and the company.

Superintendent Adrienne A. Harris suggested that today’s guidelines are part of the state’s broader attempts to regulate cryptocurrency. She says:

“[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 the safekeeping of customer assets.

The main recommendation put forward in today’s guidelines is the separation of crypto accounts. The NYDFS suggests that a company’s custodian separately manages the company’s assets and the virtual currencies deposited by customers.

Specifically, company and client assets should be held in separate on-chain wallets, although individual client accounts can be combined into an omnibus account. The two groups of assets should also be treated separately when accounting.

Today’s guidance also specifies that the custodian must have a limited interest in the assets: custodians must hold all assets for safekeeping purposes only and must not enter into a debtor-creditor relationship. Custodians may, however, enter into sub-custody agreements with a third party. Custodians must disclose all relevant terms and conditions.

These guidelines are explicitly intended to protect customers in the event of a service insolvency. It also aims to prevent the mixing of funds.

Harris said Reuters that the newly announced guidelines were not specifically driven by the collapse of FTX, which saw the company mismanage user funds and deposits in conjunction with Alameda Research. Harris called the event “timely” but said the NYDFS had been planning to release guidance on the matter for some time.

Harris said the NYDFS plans to issue upcoming guidance on stablecoins, advertising, and disclosures. The agency will also focus this year on anti-money laundering rules.

Today’s guidelines apply to companies licensed to hold custody in New York, which is known for its tough regulatory stance toward crypto. To date, only 31 companies have obtained either the state’s BitLicense or its limited-use trust charter.