New York regulators warn crypto companies against commingling customer funds

This came to the attention of crypto companies on Monday when New York regulators issued a new warning about the proper handling of their customers’ digital assets.

In an open letter to the industry, the New York Department of Financial Services (NYDFS) set out how client assets should be segregated, how they should be used by custodians, and how to comply with required disclosures when storing digital assets for Customers.

The new guidelines apply to companies operating in the state of New York that hold a BitLicense, a business license issued by New York beginning in 2015 for companies involved in digital asset activities.

The announcement comes as federal prosecutors in New York continue to investigate the collapse of FTX under founder and former CEO Sam Bankman-Fried, who is accused of diverting billions of dollars worth of client assets from the exchange to allow trading of its now defunct hedge to fuel Alameda Research fund.

“As custodians of others’ wealth, virtual currency units acting as custodians […] must have robust processes, similar to traditional financial services firms,” the NYDFS explained.

Wealth managers – like America’s oldest bank, BNY Mellon– play the crucial role in finance to hold client assets, be it funds or stocks, in an organized and secure manner. The new guidelines describe in more detail how digital assets should be handled.

The regulator advised custodians to segregate digital assets owned by others from those owned, for example, by the custodian itself, both on the chain and in the custodian’s internal books, while maintaining adequate records.

It also claimed that assets under a custodian’s control should only be held for the purpose of custody and custodians “will thereby not create a debtor-creditor relationship with the customer” when ownership of the digital assets is transferred.

Custodians are also required to provide their clients with written disclosures that include specific precautions, e.g. B. how the custodian “segregates and accounts for the custodial virtual currency and the customer’s retained ownership interest in the virtual currency.”

In drafting the new guidelines, the agency said it conducted a “robust analysis of the existing regulatory landscape,” studying market trends and speaking with industry stakeholders and other state and federal regulators.

While the new rules are straightforward, BitLicenses have caught some members of the crypto community who have criticized them in the past, such as B. Jesse Powell, CEO of Kraken, has a controversial reputation.

The exchange’s CEO pulled Kraken out of the state in 2015 in response to the regulatory environment in New York. years later, he compared state to “an abusive, controlling ex you broke up with 3 years ago but they continue to haunt you.”

As recently as May last year, Powell remained critical of BitLicenses, calling the regulation burdensome for the digital asset industry.

“After all this time, I mean, if we just looked back and did a study of the economic damage that BitLicense has done, it sure would be huge — billions of dollars,” he said on an episode of decrypt‘s gm podcast.

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