NYDFS Publishes Guidance on Crypto Insolvency Targeting Separation of Customer Funds

New York's top financial regulator on Monday published guidance for crypto companies to improve customer protection in the event of insolvency or a similar proceeding – including a requirement for firms to keep customer funds separate.

The New York Department of Financial Services (NYDFS) reiterated its requirements for record-keeping as a number of crypto entities, including Sam Bankman-Fried's FTX, is undergoing bankruptcy proceedings in the U.S.

Court documents have revealed former FTX management misappropriated customer funds, including to prop up the exchange's sister trading firm Alameda Research ahead of its collapse. FTX's new CEO John J. Ray III has also lambasted the company's previous management for its poor record-keeping.

"As stewards of others’ assets, virtual currency entities ('VCEs”) that act as custodians (“VCE Custodians”) play an important role in the financial system and, therefore, a comprehensive and safe regulatory framework is vital to protecting customers and preserving trust," the NYDFS said.

The guidance is meant to offer "greater clarity" regarding standards and practices to help ensure a "high level of customer protection with respect to asset custody" under the NYDFS' BitLicense regime, set up in 2015.

Companies regulated under the BitLicense regime are required to "custody customer virtual currency properly and maintain appropriate books and records," including segregating and separately accounting for customer funds. The regulator also requires companies to maintain clear records and "disclose to each customer in writing the general terms and conditions associated with its products, services and activities."

Read more: New FTX Boss Condemns Management of the Crypto Exchange During Sam Bankman-Fried's Tenure