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

BlockBeats News, on October 1, the New York State Department of Financial Services (NYDFS) released its latest guidelines, clarifying how licensed cryptocurrency custodians (VCEs) should structure their custody arrangements to ensure that the actual ownership of digital assets remains with the clients, even in the event of bankruptcy. This update reflects the surge in demand for virtual asset custody from both retail and institutional clients, and reiterates the department’s expectations for sound custody and disclosure practices across the industry.

The new regulations also set safeguards for the operational framework of sub-custodians to ensure that client interests are protected throughout the entire asset lifecycle—from deposit and safekeeping to withdrawal and transfer—while minimizing the risk of asset shortfalls in the event of bankruptcy of the custodian or sub-custodian. Equally important, the guidelines reaffirm the department’s stance on the permitted uses of custodial client assets.

Companies are prohibited from configuring client assets in ways that could compromise clients’ ownership or priority rights in the event of bankruptcy. The US SEC emphasizes that the structure of custody arrangements should ensure that, in the event of bankruptcy, clients’ beneficial rights remain clear, distinct, and enforceable. This includes clear and prominent disclosures explaining how assets are held, any third parties involved, and the actual impact on clients under stress events.