New York Department of Financial Services Updates Crypto Custody Guidelines, Emphasizing the Separation of Client Assets from Custodian Bankruptcy Risk

PANews reported on October 1st that the New York State Department of Financial Services (NYDFS) has released updated guidance for licensed cryptocurrency custodial entities (VCEs). The core requirement of the guidance is that the custody structure must ensure that the beneficial ownership of digital assets always belongs to the customer, and in particular, customer assets must be protected in the event of the custodial entity's bankruptcy.

The NYDFS stated that this update was made in response to the surge in demand for virtual asset custody from both institutional and retail clients, as well as the increasingly complex "sub-custodian" relationships within the industry. The new guidelines explicitly prohibit custodians from using client assets for activities that could compromise client ownership, such as rehypothecation or unsecured lending, without explicit permission and informed consent. Furthermore, the new guidelines impose stricter due diligence, contractual terms, and disclosure requirements on custodians' use of sub-custodians.

The guidance, which is intended to provide greater clarity and confidence to clients and prompt licensed entities to review their custody structures and client agreements, is now effective in 2025 and replaces the previous version from January 2023.