The New York Department of Financial Services (DFS) issued non-binding yet persuasive guidance on January 23, 2023, to safeguard virtual currency customers in the event of insolvency.
DFS-licensed or chartered entities responsible for managing virtual currency assets on behalf of their customers – known as Virtual Currency Entities (VCEs) – must have processes in place comparable to those implemented by traditional financial service providers.
Exploring the Key Points
The latest regulatory guidance on insolvency has been released, highlighting several key points, which are outlined below.
- Separation of and distinct tracking for customers’ virtual currency.
- Limited engagement and utilization of virtual customer currency by VCEs.
- Sub-custody arrangements
- Customer disclosure
Reason Behind This Move!
Following a succession of bankruptcies in the industry that led to multiple customers facing hardship, the regulator has mandated that on-chain and off-chain asset storage must remain segregated from one another. This new regulation was necessary to safeguard those affected and ensure adequate protection of funds.
The New York Department of Financial Services “Virtual Currency Guidance” document, signed by Adrienne A. Harris, NYDFS Superintendent of Financial Services, emphasizes sound custody and disclosure practices for customers to ensure protection against possible insolvency and other risk factors. This news underscores the importance of taking action to safeguard customers.
The latest rule sets clear standards and practices to ensure strong protection of customer assets for Virtual Currency Entities. The New York Department of Financial Services conditions is in line with the BitLicense and limited purpose trust company requirements.