Companies Should Separate Clients’ Crypto Assets From Their Own: NYDFS

The advisory, according to NYDFS, is meant to provide “more clarity on standards and practices.”

The New York State Department of Financial Services (NYDFS) has advised businesses to separate their clients’ cryptocurrency holdings from their own assets.

The watchdog claimed that pooling funds could result in huge financial losses for investors.

The New York State Department of Financial Services released guidelines to state-regulated enterprises on how to better protect clients in the event of potential insolvency. It described the growing interest in cryptocurrencies in recent years and emphasised the importance of companies maintaining improved control over their clients’ holdings. The agency also feels that the market requires a proper regulatory framework:

“As custodians of other people’s assets, virtual currency entities (VCE) play a crucial role in the financial system; thus, a comprehensive and safe regulatory framework is critical to protecting clients and preserving confidence.”

The NYDFS recommended businesses to maintain clients’ cryptocurrency assets distinct from other assets. “A VCE Custodian is not anticipated to mix customer virtual money with any of the VCE Custodian’s own virtual currency or with any other non-customer virtual currency,” the agency noted.

They should also release data and keep a “clear internal audit trail” to identify individuals involved in transactions involving their holdings.

Custodians should not utilise customers’ crypto assets to settle separate financial services, such as guaranteeing an obligation or giving credit, according to the regulator.

As a result, they must “clearly disclose” to clients the general terms and conditions of their holdings.

“Furthermore, the department anticipates that a VCE Custodian will make its normal disclosures and customer agreement easily accessible to clients on its website, in accordance with New York laws and regulations,” the advice said.

The superintendent of the New York Department of Financial Services, Adrienne Harris, believes that the aforementioned recommendations could have a good impact on the bitcoin business and prevent future crashes. However, she believes the regulator should have moved prior to FTX’s downfall.

After failing to respect customer withdrawal requests, the exchange declared bankruptcy in November of last year. One of the allegations levelled against its former CEO, Sam Bankman-Fried (SBF), is that his organisation mixed customers’ funds with Alameda Research, causing countless investors to lose money.

The American, 30, has pleaded not guilty to the accusations levelled against him. A trial is scheduled for October 2, 2023, to establish whether he was involved in the aftermath.