New York Pressures Crypto Custodians to Keep Client Assets Discreet

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NYDFS Issues New Guidelines for VCE Custodians

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New York is extending its tough line on cryptocurrency, with the state warning digital asset custodians to keep customer funds separate from their own and to disclose how they do so.

The guidelines, announced on January 23 and described by the States Department of Financial Services (NYDFS) as the first such rule in the United States, follow a moratorium on new crypto miners introduced in November 2022 and the introduction of BitLicense states in June 2015, which allows a company to conduct business in digital currency in New York but requires difficult and expensive application.

These guidelines apply to BitLicense holders as well as limited-purpose trust companies that provide crypto custody services.

Mixing customer funds is a big no-no in traditional finance and there’s no reason crypto should be any different, says Omid Malekan, adjunct professor at Columbia University Business School. Separate accounts facilitate auditing of a custodian during normal operations and settlement in the event of bankruptcy.

Although presented as guidelines, the new rules are intended to ensure that companies emphasize sound custody and disclosure practices to better protect customers in the event of insolvency or similar proceedings.

There have been several high-profile failures of cryptocurrency-based ventures, including the November collapse of Bahamas-based FTX.

“It’s timely, but truth be told, it was something we had on our policy roadmap even before FTX,” NYDFS Superintendent Adrienne Harris said.

That’s no exaggeration given the state’s previous moves.

Segregating assets and reducing credit exposure risk in appearance and in fact at the custodian level is the logical first step in rehabilitating our industry from negative news cycles and enabling the development of digital asset financial services. constructive, inclusive and secure, says Jack McDonald, CEO of Standard Custody & Trust, one of the companies affected by the guidelines.

Standard is one of approximately 30 companies to have obtained charters under New York’s banking law to operate as limited liability trust companies authorized to provide safekeeping of digital assets, according to the NYDFS website. . BitLicenses holders include ATM provider Coinsource and transfer service Ripple which uses XRP cryptocurrency.

New York’s tough stance on digital assets has led to an exodus of bitcoin miners, but given its central role in global finance, regulators have doubled down on scrutiny of the digital asset industry.

“While I would never be bold enough to say that no New Yorkers will be harmed in all of this, I think it is very fair to say that New Yorkers are better off than anyone else. in the country because of the framework that we have,” Harris said.

With $1.3 trillion wiped from the value of cryptocurrencies last year, with at least some of the blame falling on the lack of effective government oversight, New York regulators might be right.

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