Editor’s Note: With so much market volatility, keep up with the daily news! Engage in our quick round-up of today’s must-read news and expert opinion in minutes. Sign up here!
(Kitco News) – The New York Department of Financial Services (NYDFS) has issued a new set of guidelines for state-licensed crypto firms on how they should handle customer assets in order to prevent losses, emphasizing “the importance fundamental principle of fairness and the beneficial interest always remaining with the customer.
NYDFS Superintendent Adrienne Harris issued the guidance Jan. 23, saying companies operating under the state’s BitLicense should separate company funds from users’ virtual currency holdings both on-chain and in the custodian’s “internal ledger accounts.” ‘agency.
“To properly custody customer virtual currency and maintain proper books and records, a VCE [virtual currency entity] The Depositary should separately account for and segregate client virtual currency from the corporate assets of the VCE Depositary and its affiliated entities, both on-chain and on the VCE Depositary’s internal ledger accounts,” Harris’ letter states.
According to the NYDFS, custodians are only required to take possession of a customer’s cryptocurrencies “for the limited purpose of performing custody and custody services, and that they will not then establish a debtor-creditor relationship with the customer.”
Virtual currencies held by a custodian must be treated as belonging exclusively to customers, and custodians are prohibited from using customers’ virtual currencies for their own use.
“In no event shall a VCE custodian use customer virtual currency to secure or guarantee an obligation or extend credit to the VCE custodian or any other person,” the letter states.
“Moreover, VCE custodians are expected to act on the instructions of their clients or authorized representatives and not acquire general discretion over the assets held beyond the terms clearly set out in the VCE custodian’s client agreement.”
Custodians are also required to clearly communicate to each customer the terms and conditions of its products, services and activities. As part of their communications to clients, custodians are expected to clearly outline how they segregate and account for client virtual currency and how they may use the custodian virtual currency while in their possession.
If a custodian uses a third party sub-custody arrangement, the client agreement should clearly state the terms of that arrangement and the material risks. All VCE custodians are required to make their standard disclosures and client agreements easily accessible to clients on its website, in accordance with New York laws and regulations.
The NYSDF said the ultimate goal of the new guidance is to safeguard customer assets.
In December, the NYSDF issued guidance that state banks should seek pre-approval from the Department before undertaking new or significantly different virtual currency business. The Department has also proposed that all BitLicense holders be required to pay the costs associated with their supervision and examination.
This development by the New York regulator follows several high-profile bankruptcy filings in 2022, including FTX, BlockFi, Genesis and Voyager Digital, which could result in a significant loss of user funds.
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee its accuracy. This article is for informational purposes only. It is not a solicitation to effect any exchange of commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no liability for loss and/or damage arising from the use of this publication.