New York Department of Financial Services (NYDFS) Superintendent Adrienne Harris reminded licensed crypto custodians in the state of their fiduciary duty to ensure customer funds are not commingled with their own assets.
Harris, a proponent of the state’s BitLicense regime, issued the reminder in a regulatory guidance statement published on Monday. The guidance covered consumer protection concerns in the event of insolvency for licensed crypto custodians in the state. Monday’s regulatory note reiterated the NYDFS stance against the commingling of funds by crypto custody firms.
Commingling is when a fiduciary does not segregate its own assets from the funds that it holds on behalf of its customers. Commingling is a breach of trust in the financial markets and has been linked with the FTX collapse. FTX CEO John Ray previously testified before the U.S. Congress that FTX and its sister trading firm Alameda Research ran commingled accounts.
Crypto custodians must adhere to the same accounting best practices as their traditional finance counterparts, the guidance stated. As such, they must ensure the segregation of their assets from customer deposits. Crypto custody firms must also limit themselves to the safekeeping of client funds. They must not create a debtor-creditor relationship with their customers, the guidance reiterated.
Monday’s guidance also included rules for sub-custody arrangements and general disclosures. Sub-custody is when a licensed custodian decides to store customer funds with a third party. The NYDFS says such a practice is allowed as long as the third party is approved by the regulator.
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