Banking and Finance Law Daily Wrap Up, FINANCIAL TECHNOLOGY—New York updates guidance on virtual currency customer protections, (Oct 1, 2025)

By Jonathan Anderson

The new guidance specifies expectations for sub-custodial service agreements and reiterates standards for disclosure practices and permissible uses of customer assets.

On Sept. 30, 2025, the New York Department of Financial Services (NYDFS) issued new guidance regarding virtual currency customer protections in the event of insolvency. The update, as detailed in an industry letter, clarifies the Department’s expectations regarding acceptable sub-custodians and provides detailed expectations for sub-custodial service agreements. The guidance also reiterates standards for disclosure practices by licensed entities while continuing to emphasize the importance of equitable and beneficial interest always remaining with the customer.

Background. The state’s virtual currency regulation, 23 NYCRR Part 200, which took effect in 2015, places numerous requirements upon entities licensed or chartered to hold or maintain virtual currency assets on behalf of their customers. Among these are the virtual currency entities (VCEs) that must: hold virtual currency in a manner that protects customer assets; maintain comprehensive books and records; properly disclose the material terms and conditions associated with their products and services, including custody services; and refrain from making any false, misleading, or deceptive representations or omissions in their marketing materials. NYDFS issued a regulatory update previously in January 2023 (see Banking and Finance Law Daily, Jan. 24, 2023).

Updated guidance. Compared to the January 2023 update, the most significant change in the new guidance relates to sub-custody agreements. The updated guidance also includes non-substantive changes that merely clarify previously articulated expectations.

The new guidance specifies NYDFS’ expectations regarding acceptable sub-custodians and provides detailed expectations for sub-custodial service agreements. Such agreements must contain an acknowledgement by the sub-custodian that the sub-custodian will handle all VCE customer virtual currency in accordance with all applicable NYDFS requirements and standards. These include but are not limited to proper titling of accounts and wallets holding customer assets as “F/B/O” accounts, and segregating customer virtual currency from the corporate assets of both the VCE and the sub-custodian. Further, agreements should make clear that customer virtual currency may not be treated as collateral for the proprietary obligations of the VCE, nor may such assets be subject to any right of set-off or lien by the sub-custodian other than may be customary for ordinary fees and expenses. Sub-custodians must be either chartered or licensed by the NYDFS or subject in their home jurisdiction to a supervisory and regulatory regime for custodial activities that is substantially similar to NYDFS regime.

The updated guidance includes non-substantive changes that clarify existing policy. The guidance continues to emphasize sound custody and disclosure practices to protect customers in the event of an insolvency or similar proceeding. The guidance provides sub-custodians with guardrails to structure their asset custody framework in a way that protects the interests of customers. The guidance also maintains the Department’s expectation that the VCE custodian will take possession of customer assets only for the limited purpose of carrying out custody and safekeeping services, and that it will not establish a debtor-creditor relationship with the customer.

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