The New York State Department of Financial Services (NYDFS) has issued updated regulatory guidelines for licensed cryptocurrency custodians, introducing stricter protections for client assets, particularly in cases of custodian insolvency. The 2025 guidelines, which replace the previous 2023 version, emphasize that beneficial ownership of digital assets must remain with clients even during bankruptcy proceedings.
Enhanced Client Asset Protection
A central provision of the new framework mandates that custody structures must ensure clients retain full beneficial ownership of their digital assets. This measure directly addresses concerns about asset recovery in the event of a custodian’s financial failure, providing clearer safeguards for both institutional and retail investors.
Restrictions on Asset Use
The guidelines explicitly prohibit licensed Virtual Currency Entities (VCEs) from engaging in rehypothecation or unsecured lending of client assets without obtaining explicit permission and documented informed consent. This restriction aims to prevent custodians from leveraging client funds in ways that could compromise ownership rights or create additional risk exposure.
Strengthened Sub-Custody Requirements
Recognizing the growing complexity of custody relationships, NYDFS has implemented stricter due diligence, contractual terms, and disclosure requirements for custodians utilizing sub-custody arrangements. These measures ensure that primary custodians maintain responsibility for client assets throughout the custody chain.
Market Impact and Compliance
The updated guidelines respond to increasing institutional and retail demand for secure virtual asset custody solutions while addressing evolving industry practices. NYDFS expects the clarified regulations will boost client confidence and encourage licensed entities to review and enhance their current custody frameworks and client agreements.
The 2025 guidelines are immediately effective, replacing the previous version from January 2023, and represent New York’s continued leadership in establishing comprehensive regulatory standards for the digital asset industry.