New York Department of Financial Services (DFS) issued regulatory recommendations on January 23, 2023, to better safeguard consumers in the case of virtual currency insolvency. Although not mandatory, the advice nonetheless has persuasive power.
The guidelines are applicable to organizations that New York DFS has granted a license or chartered to manage virtual currency assets on behalf of their clients. Virtual currency entities (VCEs), which are these handling entities, are anticipated to have thorough procedures in place that are comparable to those of conventional financial service providers.
According to New York virtual currency regulation, VCEs must generally:
- Maintain virtual currency in a way that safeguards client investments.
- Keep meticulous records and books.
- disclose in a proper manner the important terms and conditions related to their goods and services, including custody services.
- Avoid making any assertions or omissions in their marketing materials that are untrue, misleading, or deceptive.
The new regulatory guideline on insolvency covers the following major issues, each of which is covered in further detail below:
- Segregation of and Separate Accounting for Customer Virtual Currency: Both on-chain and on the VCE Custodian’s internal ledger accounts, the VCE Custodian should independently account for and segregate customer virtual currency from the corporate assets of the VCE Custodian and its related organizations.
- VCEs’ limited interest: According to DFS, when a customer gives a VCE Custodian custody of an asset for safekeeping, the VCE Custodian will only use the asset for the specific purpose of providing custody and safekeeping services; it won’t use it to create a debtor-creditor relationship with the customer.
- Sub-custody Arrangements: A VCE Custodian may decide to work with a third party to set up a sub-custody agreement for the safeguarding of customer virtual currency after doing the necessary due diligence, provided that the arrangement complies with the guidelines and is authorized by DFS.
- Customer Disclosure: The VCE Custodian is required to make full disclosure of the general terms and conditions of its products, services, and activities to each client. This disclosure must include information about how the VCE Custodian separates and accounts for the virtual currency held in custody as well as the customer’s retained property interest in the virtual currency. The parties’ wishes to enter into a custodial relationship rather than a debtor-creditor relationship should be made explicit in the customer agreement for the VCE Custodian.
