The New York State Department of Financial Services on Monday released guidance related to virtual currency insolvency. The guidance applies to entities DFS 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 (VCEs) 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 guidance states. “As the prudential regulator of entities engaged in virtual currency business activity in New York and with New Yorkers; under the nation’s first comprehensive virtual currency regulatory framework, the Department considers customer protection of the utmost importance.”

This guidance is intended to offer greater clarity regarding standards and practices and help to ensure that VCE custodians are providing a high level of customer protection with respect to asset custody under the BitLicense and limited purpose trust company frameworks, according to DFS.

Specifically, the guidance focuses on customer protection relating to:

• segregation of and separate accounting for customer virtual currency;
• VCE custodians’ limited interest in and use of customer virtual currency;
• sub-custody arrangements; and
• customer disclosure.

DFS stated that the guidance is intended to “reiterate 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.”

In December 2022, DFS released guidance to financial institutions that wish to engage in virtual currency-related activities, as reported in the New York Minute. The guidance is applicable to all New York-regulated banking organizations and branches and agencies of foreign banking organizations licensed by DFS.