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New York Regulator Warns Cryptocurrency Firms To Separate Their Wealth From That Of Their Clients

Cryptocurrency companies were put on notice Monday when a new caveat from New York regulators on how to properly manage their clients’ digital assets.

In a open letter Addressed to the industry, the New York Department of Financial Services (NYDFS) outlined how customer assets should be segregated from each other, how they should be used by custodians, and how to maintain the appropriate disclosures required when holding digital assets. for customers.

The new set of guidelines applies to companies that operate in New York state and hold a BitLicense, a business license issued by New York since 2015 to companies involved in digital asset activities.

The announcement comes as federal prosecutors in New York deepen their investigations into the collapse of FTX under its former CEO Sam Bankman-Fried, who is accused of funneling billions of dollars in client assets. from the stock market to fuel the operations of his now-defunct Alameda Research hedge fund.

“As stewards of the assets of others, virtual currency entities acting as custodians […] they must have robust processes in place, similar to those of traditional financial service providers,” the NYDFS stated.

Asset custodians – like America’s oldest bank, BNY Mellon – play the crucial role in finance by keeping client assets, whether funds or shares, organized and secure. The new guidelines describe more specifically how digital assets should be managed.

The regulator advises custodians to keep digital assets belonging to others separate from those belonging to the custodian itself, for example, both on-chain and in the custodian’s internal books, while maintaining proper records.

It also stated that assets under the control of a custodian should only be held for custodial purposes, and custodians “shall not thereby establish a debtor-creditor relationship with the customer” when possession of digital assets is transferred.

Custodians are also required to provide their clients with written information specifying the specific arrangements, such as how the custodian “segregates and accounts for virtual currency held in escrow, as well as the client’s retained ownership interest in the currency.” virtual.”

In crafting the new guidelines, the agency said it conducted a “robust analysis of the existing regulatory landscape,” examined market trends, and spoke with industry players as well as other state and federal regulators.

Although the new rules are straightforward, BitLicenses have had a controversial reputation with some members of the cryptocurrency community who have criticized them in the past, such as Kraken CEO Jesse Powell.

The exchange’s CEO withdrew Kraken from the state in 2015 in response to New York’s regulatory framework. Years later, he likened the state to “an abusive, controlling ex you broke up with 3 years ago but keeps harassing you.”

As late as May of last year, Powell was still critical of BitLicenses, calling the regulation burdensome for the digital asset industry.

“After all this time, if we were to look back and do a study of the economic damage caused by BitLicenses, I’m sure it would be tremendous: billions of dollars,” he said on an episode of Decrypt’s gm podcast.

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