New York Tightens Crypto Custody Rules: Customer Assets Must Be Protected Even in Bankruptcy

BlockBeats News, October 1st, the New York State Department of Financial Services (NYDFS) released the latest guidance, outlining how licensed crypto custodian entities (VCE) should construct a custody structure to ensure that the actual ownership of digital assets remains with the customer, even in the event of bankruptcy. This update reflects a surge in demand from retail and institutional customers for virtual asset custody and reiterates the department's expectations for sound custody and disclosure practices across the industry.

The new rules also set up guardrails for the operational framework of sub-custodian entities to ensure that customer interests are protected throughout the asset lifecycle (from deposit and custody to withdrawal and transfers) while minimizing the risk of asset shortfall in the event of custody or sub-custodian entity bankruptcy. Equally important, the guidance reaffirms the department's stance on the permitted use of customer assets under custody.

Companies shall not allocate customer assets in a manner that could impair customer ownership or priority in the event of bankruptcy. The SEC emphasizes that the structure of custody arrangements should ensure that customer beneficial rights remain clear, explicit, and enforceable in the event of bankruptcy. This includes clear and prominent disclosures explaining the manner of asset holding, any involved third parties, and the actual impact on customers in stress scenarios.