The New York Financial Services Department Releases Guidelines on Licensed Crypto Firms in Insolvency Cases.

To better handle insolvency cases, the New York financial services department released guidelines on how licensed crypto can take their customer assets should they face insolvency or other similar issues. The superintendent for the New York department of financial services announced that crypto firms and exchanges that are operating under a BitLicense, a requirement in New York, should start segregating corporate funds from user’s virtual currency holdings, both the ones on-chain and in the internal ledger accounts of the company’s custodian. 

Regulators also stated that crypto firms should only be expected to hold users’ assets for the limited purpose of carrying out custody and safekeeping activities. The guidelines clarified that an agreement should exist between both parties so their intentions to enter into a custodial relationship rather than a debtor-creditor relationship are as straightforward as possible. 

Another added information from the New York financial services department is that all licensing firms acting as custodians of assets should ensure they maintain appropriate records and information and provide the information related to their products and services in the terms and conditions made available to customers. The major push behind these new guidelines is a sharp attempt at providing more safety for customer assets.

Since last year, the New York Department of Financial Services has been creating significant laws regarding crying. In December 2022, the department submitted a proposal to change state laws that would enable them to charge licensed crypto companies for the service of regulation. It had seemed like a preposition, but under laws of Financial service, it is known to be standard practice for the DSF to charge licensed other financial institutions, not crypto related to the costs and expenses that come with overseeing their operations, so the New York Department of Financial Services recommending it for crypto entities is not that big of a shock, especially given the time and effort that goes into maintaining crypto operations, with the considerable risk factor attached to them. However, the primary purpose of the proposal being sent in had been to create a sort of equality between other financial institutions and crypto-related institutions regarding regulations. 

The proposal documents pushed for firms to be charged based on their own total operating expense after overseeing their licensees and the charges determined as fair for their operating and overhead costs, which pushes that there is no set charge included in the proposal, which means the figures for every firm would differ. It was, however, included in the suggestion that the total amount owed would be broken down into five payment terms over the fiscal year.

The decision being made by the New York department of financial services could be attributed to the chaos that has plagued the crypto space, worsened even by the collapse of FTX, which was what sent crypto regulators scrambling to create extra regulatory oversight for how much more attention now has to be paid to these crypto firms to avoid a recurrence of a situation like FTX and the best way to do this is to regulate cryptocurrency more tightly. 

The U.S, since the collapse of FTX and other exchanges that were exposed to it, has since set out to make harsher crypto laws to better protect their financial sector from another crisis caused by a crypto company, hence the discussion about creating more regulatory barriers, the creation of regulatory frameworks that protect consumers interests, in the case of insolvency and other situations similar to it.

In December, the chair of the commodity futures trading commission said that there need to be more gaps in the legislation regarding cryptocurrency for the power his agency holds to be relevant. If the laws required to back the CTFC’s regulatory efforts on crypto are nonexistent on the legal front, all attempts would likely fall flat. With new authority for the CTFC to hold onto, there will continue to be gaps in the federal regulatory framework, even with the regulators continuing to act with the existing authority they have. This pushed the New York department to create strict laws and look towards other proposals that could be made to protect the consumers and the general market in case of another massive implosion in the crypto space.

Conclusion

Suppose the new laws set by the New York Department of financial services are appropriately followed. In that case, there may be a chance to make significant changes to the issues of users being affected by implosions from exchanges and their exposure to it.