Money Transfer

Superintendent Adrienne A. Harris Releases Consumer Protection Guidance In the Event of Virtual Currency Insolvency

Superintendent Adrienne A. Harris Releases Consumer Protection Guidance In the Event of Virtual Currency Insolvency

Guidance Reiterates Department’s Expectation For Sound Custody And Disclosure Practices For Licensed Entities

Today New York Department of Financial Services (“DFS”) Superintendent Adrienne A. Harris released Regulatory Guidance to better protect customers in the event of an insolvency or similar proceeding. The Regulatory Guidance reiterates expectations for sound custody and disclosure practices and the paramount importance of the equitable and beneficial interest in the asset always remaining with the customer.    

“DFS’s virtual currency regulation has protected New Yorkers since 2015,” said Superintendent Harris. “Today’s guidance reminds DFS-regulated virtual currency companies of our expectations regarding the safekeeping of customer assets.” 

The guidance applies to those entities the Department has licensed or chartered to custody, or temporarily hold, store, or maintain virtual currency assets on behalf of their customers. As stewards of others’ assets, virtual currency entities that act as custodians, including without limitation, storing, holding, or maintaining custody or control of virtual currency on behalf of others, must have robust processes in place, akin to traditional financial service providers.  

New York’s virtual currency regulation requires entities to, among other things, hold virtual currency in a manner that protects customer assets; maintain comprehensive books and records; properly disclose the material terms and conditions associated with their products and services, including custody services; and refrain from making any false, misleading or deceptive representations or omissions in their marketing materials. Entities operating under the BitLicense and Limited Purpose Trust Charter are held to these requirements through DFS supervision and examinations, or when need be, enforcement actions.  

New Regulatory Guidance on Insolvency Addresses the Following: 

  • Segregation of and Separate Accounting for Customer Virtual Currency: To custody customer virtual currency properly and maintain appropriate books and records, a VCE Custodian (“a Virtual Currency Entity” that acts as a Custodian) should separately account for, and segregate a customer’s virtual currency from, the corporate assets of the VCE Custodian and its affiliated entities, both on-chain and on the VCE Custodian’s internal ledger accounts.   

  • VCE Custodian’s Limited Interest in and Use of Customer Virtual Currency: When a customer transfers possession of an asset to a VCE Custodian for the purposes of safekeeping, the Department expects that the VCE Custodian 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.   

  • Sub-Custody Arrangements: A VCE Custodian may elect, after appropriate due diligence, to arrange for the safekeeping of customer virtual currency through a sub-custody arrangement with a third party, so long as that arrangement is consistent with this Guidance and approved by the Department. 

  • Customer Disclosure:  A VCE Custodian is expected to clearly disclose to each customer the general terms and conditions associated with its products, services and activities, including how the VCE Custodian segregates and accounts for the virtual currency held in custody, as well as the customer's retained property interest in the virtual currency. Further, a VCE Custodian's customer agreement should make clear the parties’ intentions to enter into a custodial relationship, rather than a debtor-creditor relationship. 

DFS has and continues to use all of its regulatory tools to keep pace with the industry, make data-driven policy decisions, and respond proactively to the virtual currency market. To develop the Regulatory Guidance, DFS conducted a robust analysis of the existing regulatory landscape and market trends, and engaged with external subject matter experts, licensed and chartered entities, and other state and federal regulators. 

For a copy of the Regulatory Guidance please visit DFS's Virtual Currency Guidance webpage

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