On January 23, 2023, the New York Department of Financial Services (“NYDFS”) released guidance on its expectations for custody and disclosure practices for virtual currency belonging to an institution’s customers (“NYDFS Custody Guidance”).1

The issues surrounding custody, disclosure and “ownership” of crypto assets in insolvency proceedings have become more widespread and acute in light of the high-profile bankruptcies of crypto asset businesses such as Voyager and Celsius in the past 12 months. The NYDFS Custody Guidance is intended to help institutions better protect customers in the event of an insolvency or similar proceeding. While the NYDFS Custody Guidance applies only to virtual currency entities that are regulated by NYDFS, other institutions may find it instructive regarding steps they may take to protect customers.

The NYDFS Custody Guidance is effective immediately, although it arguably does not have the same force of law as a statute or regulation, as we note below. In this Legal Update, we provide background on the challenges posed in the custody of virtual currency and discuss the key points in the NYDFS Custody Guidance.

Background – Custody of Virtual Currency

A customer that places an asset with a financial institution may do so under various legal relationships. For example, when a customer deposits US dollars in a traditional bank account, the customer establishes a debtor-creditor relationship with the bank, under which the bank takes ownership of the US dollars and owes the customer an equivalent sum of money. This type of arrangement is typically used when the asset is fungible. An alternative mechanism is a custodial relationship, under which an institution takes possession and control of an asset (often, a specific or non-fungible asset), but the customer retains ownership of the asset until it is returned by the institution. A simplistic historical example is when a bank would allow a customer to store documents or jewelry in a vault or safe deposit box. The bank would be in possession of the asset (by virtue of controlling access to the vault), but ownership of the asset would remain with the customer. In an insolvency context, the nature of this relationship is important because it determines whether the underlying asset sits outside the bankruptcy estate if the institution enters insolvency (and therefore should remain property of the customer and not available for distribution to other creditors) or instead becomes part of the institution’s bankruptcy estate (and therefore is subject to priority distribution waterfall, with the customer’s claim typically treated ratably with similarly situated creditor claims).

Virtual currency presents certain challenges from a custody perspective. Most virtual currency is, like US dollars, a fungible intangible asset. However, unlike deposits of fiat currencies in traditional bank accounts, virtual currencies that are custodied with an institution may be maintained in discrete customer wallets with private keys for those wallets secured by the institution.

In addition, virtual currency accounts are not insured by the Federal Deposit Insurance Corporation (“FDIC”).2 As a result, there is no guarantee of repayment or return of the customer’s virtual currency holdings, a guarantee that applies to most traditional bank accounts (subject to applicable dollar limits and other restrictions) if the depository institution fails. Therefore, failure to establish the existence of a custodial relationship may expose the customer to substantial loss of the value of their virtual currency assets if the custodying institution enters into insolvency proceedings. These types of losses—and the legal limbo that these virtual currencies inhabit in insolvencies—have emerged in bankruptcies of several nonbank institutions that held virtual currency accounts for retail customers. While one bankruptcy court recently held that customers did not maintain ownership of their crypto assets that were held by an institution, that decision was fact-specific and may not apply more broadly.3 Given the uncertainty surrounding the legal status of virtual currency deposits, the NYDFS Custody Guidance may provide useful guidelines on these unsettled issues.

NYDFS Custody Guidance

Since 2015, NYDFS has required nonbank financial institutions providing virtual currency services to customers in New York State to be licensed under its BitLicense regime. Additionally, NYDFS has authorized certain trust companies to hold virtual currency assets on behalf of customers. BitLicensees and authorized trust companies are referred to in the NYDFS Custody Guidance as virtual currency entities.4

The NYDFS Custody Guidance discusses four customer protection issues and establishes supervisory expectations for how an institution that custodies virtual currency—a “virtual currency entity”—will address them.

  1. Segregation of and Separate Accounting for Customer Virtual Currency: A virtual currency entity is expected to separately account for and segregate customer virtual currency from the corporate assets of the virtual currency entity and its affiliated entities, both on-chain and on the virtual currency entity’s internal ledger accounts. The NYDFS Custody Guidance explains the manner in which a virtual currency entity should maintain its on-chain and internal records and indicates that they should have clearly documented policies and procedures to evidence that these safeguards are in place.

  2. Limited Interest in and Use of Customer Virtual Currency: A virtual currency entity is expected to take possession of virtual currency only for the limited purpose of carrying out custody and safekeeping services, and it should not thereby establish a debtor-creditor relationship with the customer. For example, a virtual currency entity should not use customer virtual currency to secure or guarantee an obligation of, or extend credit to, the virtual currency entity or any other person.

  3. Sub-Custody Arrangements: A virtual currency entity should conduct appropriate third-party due diligence and risk management on sub-custody arrangements involving virtual currency. Further, NYDFS generally expects a virtual currency entity to obtain prior approval of these arrangements.

  4. Customer Disclosure: A virtual currency entity is expected to (i) clearly disclose to each customer in writing the general terms and conditions associated with its products, services and activities and (ii) obtain acknowledgment of receipt of this disclosure prior to entering into an initial transaction with the customer. In addition, the virtual currency entity’s customer agreement should make clear the parties’ intentions to enter into a custodial relationship rather than a debtor-creditor relationship.


The recent bankruptcy cases involving institutions holding virtual currency for customers have focused the industry’s attention on the legal nature of these virtual currency custody arrangements. The NYDFS Custody Guidance was likely issued in response to concerns that customers should not be exposed to substantial risk of loss for what many customers presumably expected to be secure deposits of currency.

However, it is important to bear in mind that customer relationships generally are created through private contracts and a court is not bound by the NYDFS Custody Guidance. As a result, an institution’s adherence or failure to adhere to these guidelines would not necessarily give rise to an action to return a customer’s virtual currency in an insolvency proceeding.

In light of the unsettled and evolving state of these legal issues, those seeking to custody their virtual currency with institutions should perform careful due diligence regarding the terms and conditions under which virtual currency is deposited and custodied. In particular, the NYDFS Custody Guidance may be used as a tool in assessing those terms and conditions.

1 NYDFS, Guidance on Custodial Structures for Customer Protection in the Event of Insolvency (Jan. 23, 2023), https://www.dfs.ny.gov/industry_guidance/industry_letters/il20230123_guidance_custodial_structures.

2 This point was emphasized in the FDIC’s recent proposal on advertising requirements: https://www.mayerbrown.com/en/perspectives-events/publications/2022/12/fdic-proposes-new-signage-and-advertising-requirements.

3 See, e.g., Dietrich Knauth, U.S. judge says Celsius Network owns most customer crypto deposits, Reuters (Jan. 5, 2023), https://www.reuters.com/business/finance/us-judge-says-celsius-network-owns-most-customer-crypto-deposits-2023-01-05/.

4 The NYDFS Custody Guidance states that virtual currency entities include BitLicensees and trust companies. It is unclear if NYDFS intends it to apply to other financial institutions that are regulated by NYDFS and may custody virtual currency (e.g., New York-chartered banks).