In Wake of FTX, New York Reminds Crypto Firms to Segregate Customer Funds
The crypto exchange's bankruptcy proceedings revealed poor segregation of customer funds, so the New York regulator is reminding service providers to keep clean records.
New York's top financial regulator on Monday published guidance for crypto companies to improve customer protection in the event of insolvency or a similar proceeding – including a requirement for firms to keep customer funds separate.
The New York Department of Financial Services (NYDFS) reiterated its requirements for record-keeping as a number of crypto entities, including Sam Bankman-Fried's FTX exchange, is undergoing bankruptcy proceedings in the U.S.
Former FTX management is alleged to have misappropriated customer funds, including to prop up the exchange's sister trading firm Alameda Research ahead of its collapse. FTX's new CEO, John J. Ray III, has also lambasted the company's previous management for its poor record-keeping.
"As stewards of others’ assets, virtual currency entities ('VCE') that act as custodians ('VCE Custodians') play an important role in the financial system and, therefore, a comprehensive and safe regulatory framework is vital to protecting customers and preserving trust," the NYDFS said.
The guidance is meant to offer "greater clarity" regarding standards and practices to help ensure a "high level of customer protection with respect to asset custody" under the NYDFS' BitLicense regime, set up in 2015.
Companies regulated under the BitLicense regime are required to "custody customer virtual currency properly and maintain appropriate books and records," including segregating and separately accounting for customer funds. The regulator also requires companies to maintain clear records and "disclose to each customer in writing the general terms and conditions associated with its products, services and activities."
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.
Learn more about Consensus 2023, CoinDesk’s longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.