New York’s financial watchdog is cautioning firms to segregate customers’ cryptocurrency assets from their own.
The New York State Department of Financial Services (NYDFS) issued that warning Monday (Jan. 23) as it updated its regulations designed to protect consumers from insolvencies at digital asset companies.
“DFS’s virtual currency regulation has protected New Yorkers since 2015,” said NYDFS Superintendent Adrienne Harris. “Today’s guidance reminds DFS-regulated virtual currency companies of our expectations regarding the safekeeping of customer assets.”
The updated guidance also says that the NYDFS expects that a company will take possession “of the customer’s asset only for the limited purpose of carrying out custody and safekeeping services and that it will not thereby establish a debtor-creditor relationship with the customer.”
Companies are also required to disclose to customers the terms and conditions of their products and services, including how they segregate and account for crypto assets.
The update comes as the crypto industry continues to see the fallout from a massive collapse caused — in part — by the co-mingling of customer funds.
As noted here late last year as part of a conversation with Stifel CEO Ron Kruszeweski, the risks facing the crypto sector — as highlighted by the downfall of FTX — are centered around the role of consumer protection.
“The concept of the customer protection role at its heart means you will not commingle your customer funds, and importantly you will also have what we call possession and control — if you give me your money or securities, I will know where they are and know that they are yours,” Kruszewski told PYMNTS’ Karen Webster. “It should be clear the SEC has the jurisdiction to protect U.S. investors.”
NYDFS is considered one of the country’s toughest and most respected regulators of virtual currency in the United States.
“Its head controls New York’s BitLicense, which has long been seen as both the gold standard in the regulation of cryptocurrency businesses in the U.S. and a regime so tough that many perfectly legitimate companies fled the state — and won’t do business with New Yorkers,” PYMNTS wrote recently.
Nevertheless, the agency’s reputation also gives those that have stayed significant credibility within the traditional financial community.
Its purview doesn’t just end with cryptocurrency. Last week, the NYDFS said it was updating regulations and methodologies for check cashing fees — using a data-driven approach.
The agency said the new rules replace methods established in 2005. Fee increases were automatically granted yearly using the Consumer Price Index, a measure of inflation.
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