The New York Department of Financial Services (NYDFS) has released guidelines for licensed crypto firms on how to handle customer assets in case of insolvency or similar proceedings. In a statement, NYDFS Superintendent Adrienne Harris offered wise advice to firms and exchanges operating under a BitLicense. This is a term for a specific business license needed to conduct virtual currency transactions, which is required in New York state.
Per Ms. Harris, applicable organizations should segregate corporate funds from users’ virtual currency holdings. This applies to both on-chain and in the internal ledger accounts of the company’s custodian. She also specified that the relationship should not be that of a debtor-creditor. Rather, it should be approached as a custodial agreement between clients and the virtual currency entity (VCE). This is sage advice to effectively implement the recommended practices.
Common Sense Advice
According to the regulator, crypto firms are expected to hold users’ assets “only for the limited purpose of carrying out custody and safekeeping services.” The NYDFS further added that all licensed firms holding assets should “maintain appropriate books and records.”
Of equal importance is to disclose all information related to its products and services to customers. Terms and conditions must be clearly explained to investors so they can analyze any potential risks. The NYDFS is hopeful that these guidelines will help ensure the safekeeping of customer assets.
The release of these suggestions comes after several crypto exchanges based in the United States filed for Chapter 11 bankruptcy protection. These organizations include FTX, BlockFi, Voyager Digital, and Genesis. Many former customers of these firms are unsure about the reimbursement of their investments amid these bankruptcy proceedings.
A Core Framework
The NYDFS has been a strong advocate for regulation in the crypto space. In November 2022, Harris said that lawmakers at the federal level should consider a “framework nationally that looks like what New York has” in terms of crypto regulation. This is a reference to the state’s BitLicense regime. It is not the first time this watchdog has offered sage advice. It previously released guidance for the regulation of U.S. dollar-backed stable coins.
These NYDFS suggestions highlight the need for proper regulation in the crypto space to protect customers’ assets. It is vital that crypto firms be transparent about their intentions and to maintain appropriate books and records. As the crypto industry continues to grow, regulators must take steps to protect consumers and ensure that they are treated fairly.