New York Regulator Releases Guidelines For Segregating Customer Funds

• NYDFS sent a public letter to the sector explaining the need of segregating client funds.
• This warning comes as New York’s federal prosecutors delve more into the demise of FTX.

On Monday, New York authorities issued a further warning to the crypto industry, this time regarding how to safely manage its clients’ digital assets.

The New York Department of Financial Services (NYDFS) sent a public letter to the sector explaining the need of segregating client funds, the role that custodians should play, and the necessity of keeping up-to-date disclosures when handling digital assets on behalf of customers.

Managing Digital Assets of Clients

Companies with a BitLicense, a special operating permit given by the state of New York to those engaged in digital asset operations as of 2015, are subject to the new regulations.

This warning comes as New York’s federal prosecutors delve more into the demise of FTX under its former CEO Sam Bankman-Fried, who is suspected of diverting billions of dollars in client money to finance trades at his now-defunct hedge fund, Alameda Research.

Custodians of financial assets, such as the oldest bank in the United States, BNY Mellon, play a significant role in the financial sector by safely storing the money and stocks of its clients. The new rules provide a more detailed description of how digital assets should be managed.

While keeping proper records, the regulator recommended that custodians keep the digital assets of their clients distinct from their own, both on-chain and in the custodian’s internal books.

It further said that the custodian’s custody of the client’s digital assets was for safeguarding purposes only and that the custodian “will not thereby establish a debtor-creditor relationship with the customer” upon receipt of the assets.