New York Regulator Obliges Crypto Firms to Segregate Customers’ Funds
The New York State’s financial regulator warned crypto firms to prioritize segregating users’ funds. The directive published on January 23 reminds crypto firms to separate the users’ funds to safeguard customers’ investments during insolvency.
Necessity for Segregating and Record Keeping of Customers’ Holdings
The guidance published on Monday challenged the crypto service providers to prioritize proper records citing the inadequate segregation of users’ funds revealed during the FTX bankruptcy proceedings. In particular, the Department of Financial Services in New York (NYDFS) decried the failure of the majority of crypto firms to maintain proper books of record indicating customers’ holdings.
NYDFS reiterated that the absence of proper records detailing the customers’ funds holding made it challenging for users’ digital wealth. Citing the sudden FTX collapse, NYDFS warned custodial wallets and crypto exchanges from collectively holding users’ funds into a single bundle.
Fighting Misappropriation of Users’ Funds
The NYDFS report regretted that the absence of record-keeping in crypto exchanges allowed the rerouting of users’ funds witnessed in Sam Bankman-Fried’s FTX. In particular, New York’s regulator alleged the axed FTX management citing misappropriation of users’ funds.
The regulator echoed the revelation that Sam Bankman-Fried exploited the absence of segregated users’ funds to support an affiliate FTX entity Alameda Research instead. The current FTX chief executive John Ray III condemned the Bankman-led executives who ran the empire while relying on poor record-keeping.
The NYDFS guidance acknowledged that virtual currency entities assuming the custodians’ roles have fundamental input as stewards of the crypto assets. The regulatory entity explained that formulating a comprehensive framework is critical to fostering customers’ protection to preserve trust.
Reminding Crypto Firms to Comply with BitLicense Provisions
The guidance conveyed by the NYDFS indicates that delivering greater regulatory clarity will involve setting standards that prioritize customer protection. Its accomplishment in asset custody services will complement the provisions of the BitLicense regime established in 2015.
The guidance challenges crypto firms to comply with the BitLicense regime provisions. NYDFS restated that BitLicense directed all crypto operators to identify and treat customers’ digital wealth holding as separate and supported by properly maintained records. Further, the regulator obliged the crypto firms to inform each customer of the contractual terms and conditions attributed to the products and services.
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