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Recently, the NYDFS (New York Department of Financial Services) unveiled a set of regulations designed to safeguard the customers of cryptocurrency companies in case of financial failure or bankruptcy.

NYDFS Unveils Guidelines For Crypto Custodians

Adrienne Harris, the Superintendent of the NYDFS, noted that it is important to safeguard crypto users given the numerous bankruptcy filings in 2022, where millions of users lost access to their funds.

Recently, two crypto firms, BlockFi and Genesis, joined the long list of companies that have filed for bankruptcy. The guidance stressed the importance of ensuring that users are always the top priority of crypto firms.

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In addition, the NYDFS highlighted the need for proper custody and disclosure practices by crypto firms to protect customers. Furthermore, the NYDFS superintendent said this guideline applies to licensed crypto entities that provide crypto asset custody services.

Harris stated that crypto custodians play a crucial role in the economy as more users embrace digital assets. Therefore, a comprehensive and safe regulatory framework is necessary.

The regulator believes that this framework will be crucial in protecting users and maintaining trust. Another key topic addressed in the updated guidance was the separation of customers’ digital assets.

Harris said cryptocurrency exchanges operating in New York must clearly distinguish between company funds and customers’ cryptocurrency holdings in their internal ledger accounts and the blockchain.

The regulator emphasized that these companies should only hold customers’ assets to provide custody and safekeeping services and not to establish a debtor-creditor relationship.

The regulator also emphasized the need for crypto companies to disclose the terms and conditions of their products and services to prospective customers, including the procedures for keeping these assets.

Lastly, the DFS guidance also addressed the issue of sub-custody arrangements with third parties. It emphasized the importance of crypto companies conducting research before entering into such agreements and ensuring they comply with NYDFS rules.

Post-FTX Crisis In New York

In the past years, there has been broader crypto adoption globally. However, the recent FTX debacle has painted the industry badly.

After the FTX bankruptcy crisis last November, crypto investors became scared of leaving their assets on centralized exchanges, leading to greater interest in crypto self-custody services.

FTX, which was once a prominent crypto player, has taught regulators, observers, and players in the crypto space a valuable lesson. Furthermore, the FTX implosion forced regulators and policymakers to sit up and work towards regulating the crypto sector.

Therefore, it is not a coincidence that New York’s recent regulation centers on crypto custody and protecting users’ assets. Meanwhile, the recent guidance is one of several crypto-related directives the NYDFS has issued in the last 12 months.

Besides, the organization is known for being a highly strict crypto regulator in the US. However, the agency’s reputation gives great credibility to companies operating under its jurisdiction.

Earlier this year, the NYDFS announced that the popular crypto exchange, Coinbase, had agreed to a $100 million settlement. The settlement is a financial penalty the exchange made for non-compliance with anti-money laundering rules in the state.

This action came after the agency imposed a $30 million fine on Robinhood Markets for allegedly violating cybersecurity, consumer protection, and anti-money laundering rules.

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George Ward

By George Ward

George Ward is a crypto journalist and market analyst at Herald Sheets, known for his engaging articles on the latest digital currency trends. With a background in finance and journalism, he presents complex topics accessibly. George holds a degree in Business and Finance from the University of Cambridge.