On Monday, the New York State Department of Financial Services (NYDFS) issued crucial regulatory guidance for all crypto companies operating in the state, mandating them to strictly separate customer funds from their own.

This move, led by NYDFS Superintendent Adrienne Harris, is aimed at safeguarding the interests of customers in the event of an insolvency or similar proceeding. The guidelines, which were issued in the wake of recent allegations that crypto exchange platform FTX allegedly used customer funds for illicit loans, emphasize the need for companies to maintain a clear and transparent accounting system for both customer and company funds. 

It has been alleged that the former management team at FTX misused customer funds for their own gain, including using them to bolster the operations of its sister company, Alameda Research, prior to its collapse. The current CEO, John J. Ray III, has publicly criticized the previous management for their inadequate record-keeping practices. 

The New York Department of Financial Services has issued guidance outlining four key policies that virtual currency entities (VCEs) should implement. These policies include maintaining separate accounts for customer virtual currency, limiting VCE custodians' access to and use of customer virtual currency, implementing sub-custody arrangements, and providing clear disclosure to customers. 

NYDFS is leading the way among state financial regulators by issuing guidance for banks. According to a spokeswoman for the agency, "DFS’s regulations and guidance together form a supervisory framework that helps to protect consumers and preserve the safety and soundness of companies.” 

Adrienne Harris announced the need for guidance as traditional financial institutions innovate and the crypto market evolves. A customized review process is designed to ensure that cryptocurrency exchanges like FTX have sound financials and proper risk controls, including cybersecurity and anti-money laundering measures.