On January 23, the NY DFS released updated guidance with regard to better protecting consumers in the event of virtual currency insolvency. This updated guidance applies to entities that DFS has licensed or chartered to hold or maintain virtual currency assets on behalf of their customers. The guidance reiterates that as custodians, such entities must have practices in place to maintain custody and control of virtual currency similar to that of traditional financial service providers. DFS’ previous guidance already required certain practices, such as maintaining books and records, disclosure of certain terms, and protections in place for the assets held. The new guidance sets forth additional requirements and most pertinently, custodians must:
- Separately account for and segregate each customer’s virtual currency from corporate assets of the custodian and/or affiliated entities as a part of maintaining books and records;
- Only take possession of the currency for purposes of custody and safekeeping services (not for use as to establish a debtor-creditor relationship);
- Have sub-custody arrangements in place when third parties are involved, which is allowable as long as it is consistent with DFS guidance; and
- Scrutinize and, if applicable, increase their requirements for disclosure, including having an agreement to enter a custodial relationship, rather than a debtor-creditor relationship, as well as clearly set forth terms and conditions, services and activities, processes for segregation of accounts in custody, and retained property interest.
Putting it into Practice: With the recently volatile nature of the virtual currency space, it is vital for custodians of such virtual currency to abide by all applicable regulations. Being aware of and quickly implementing any and all best practices will best protect custodians from negative ramifications, particularly in the event of insolvency.