On Monday, regulators in New York put crypto firms on notice when they issued a new warning about how they should deal with the digital assets of their customers properly.
The New York Department of Financial Services (NYDFS) issued an open letter to the industry in which it provided details on how customer assets are to be kept separated from each other.
The letter also provided details about how custodians should use customer funds and how proper disclosures need to be maintained when the companies are holding onto digital assets for their clients.
The new set of guidelines is applicable to firms that have a BitLicense and are operating in New York.
The former is a business license that was issued to companies focusing on activities related to digital assets in New York from 2015 onwards.
This notice comes at a time when federal prosecutors are digging into the downfall of FTX under the leadership of former CEO and co-founder Sam Bankman-Fried.
The disgraced crypto entrepreneur has been accused of using customer assets worth billions of dollars deposited on the exchange for conducting trades on the trading desk Alameda Research that he had founded.
The NYDFS said that crypto companies function as stewards of the assets of others. Since they play the role of custodians, they need to have robust processes, similar to those of traditional financial services providers.
One of the most vital roles played in the world of finance is by asset custodians and BNY Mellon, the oldest bank in America, is one of them.
They hold onto the assets of their clients, whether they are stocks or funds, and keep them in a secure and organized manner.
The new guidelines are specifically aimed at outlining how digital assets should be handled. Custodians were advised by the regulator to keep their own digital assets and that of their clients separate.
They dictated that these should be kept separate not just in terms of the internal books of the custodian, but also on-chain and appropriate records should also be maintained.
It also added that the assets that are under the custodian’s control should only be held for the primary purpose of safe-keeping and a debtor-creditor relationship should not be established between the custodian and their clients.
Apart from that, custodians also need to provide written disclosures to their clients, which highlight specific arrangements, such as how segregation is done for the digital assets that are held.
The agency stated that it had done a thorough analysis of the regulatory framework that exists, had examined market trends, and also spoken to federal regulators and industry players.
It used these resources for developing the guidelines in question. The new rules are quite straightforward, but there is controversy surrounding BitLicenses.
They have been criticized in the crypto community in the past, including prominent members like Jesse Powell, the CEO of the Kraken exchange.
The exchange left the state in 2015 due to the regulatory framework.