On Monday, the New York Department of Financial Services (NYDFS) issued guidelines on custody structures to help protect clients' money in the event of a crypto company's bankruptcy. The main financial regulator in New York pointed out that companies should not mix client funds and that client funds should be segregated on a separate basis.
FTX Collapse Invites NYDFS to Issue Guidance on Virtual Currency Custodian Rules.
As a result of the recent collapse of the FTX and the allegations against its cofounder, Sam Bankman-Fried, and the best vice-principals, The New York Department of Financial Services (NYDFS) has issued guidelines that require segregating client assets held by a virtual currency company.
The instructions came from Adrienne Harris, the DFNY's superintendent, and the regulator insists that depositories of virtual currencies must apply a "secure regulatory framework" to protect customers and maintain confidence. The National Bank of Nova Scotia guidance document provides a summary of four different policies and standards that virtual currency entities (VCUs) are expected to meet. There are four policies:
- Segregation of and Separate Accounting for Customer Virtual Currency;
- VCE Custodian’s Limited Interest in and Use of Customer Virtual Currency;
- Sub-Custody Arrangements; and
- Customer Disclosure.
"properly retain the client's VC and maintain proper books and records, a depositary of equity securities shall recognise and segregate the customer's virtual currency separately from the assets of the company of the depositary of equity securities and its affiliates, both on the internal general LEDGER accounts of the depositary", says the New York regulator.
The regulatory body added that depositories should have a limited interest in client funds and the use of a client's virtual assets. "when a client transfers ownership of property to a custodian for custodial purposes, the ministry expects the custodian to take possession of it only for the limited purpose of providing child care," explains the guidance.
How do you feel about the DFNY guidelines on custodial structures for protecting clients in the event of the insolvency of a crypto company? Reflect on these in the comments section below.