New York tightens crypto custody rules: actual ownership of digital assets remains with customers even in bankruptcy

The New York State Department of Financial Services (NYDFS) has issued updated guidance on how licensed cryptocurrency custodian entities (VCEs) should structure custody structures to ensure that the actual ownership of digital assets remains with the customer, even in the event of bankruptcy. The update reflects the surge in demand for virtual asset custody from retail and institutional clients, and reiterates the department's expectations for sound custody and disclosure practices across the industry.
The new rules also set guardrails for the sub-custodian's operating framework to ensure that client interests are protected throughout the asset lifecycle, from deposits and custody to withdrawals and transfers, while minimizing the risk of asset shortages in the event of a custodian or sub-custodian insolvency. Equally important, the guidance reaffirms the sector's commitment to, permissible uses for, custodial client assets.
Firms must not allocate client assets in a manner that could compromise a client's ownership or priority in the event of bankruptcy. The SEC emphasizes that custody arrangements should be structured to ensure that a client's beneficial rights remain clear and enforceable in the event of bankruptcy. This includes clear, prominent disclosures explaining how assets are held, any third parties involved, and the actual impact on clients in the event of a stressful event.