On September 30, NYDFS issued updated guidance for virtual currency entities (VCEs), including “BitLicensees” and limited purpose trust companies licensed or chartered to provide virtual currency custody services. The guidance, which supersedes prior guidance from January 2023 (covered by InfoBytes here), reiterated that the “equitable and beneficial interest” in custodied digital assets “always remain[s] with the customer,” and provides additional direction on the use of sub-custodians, segregation of assets, and disclosure practices. Among other things, the guidance reiterated previous expectations for segregation of consumer virtual currency from corporate assets of the licensee.

NYDFS clarified its expectations for sub-custody arrangements, including that new sub-custodian relationships require NYDFS approval and that service agreements must ensure customer assets are properly segregated and not used as collateral for proprietary obligations. Further, the guidance specified that the transfer of an asset to a VCE does not establish a “debtor-creditor relationship with the customer,” but is instead for the purpose of “safekeeping.” The guidance also emphasized that VCEs must maintain separate accounting for customer assets, treat customer assets as belonging solely to the customer, and refrain from using such assets for their own benefit.

The Department further instructed VCEs to provide clear written disclosures to customers about custody arrangements, segregation practices, and any sub-custody relationships, and to make these disclosures “readily accessible” on their websites. NYDFS stated that these measures were intended to protect customers in the event of insolvency or similar proceedings and to ensure sound custody and disclosure practices as demand for digital asset custody services grows.