Recognizing the growing demand for virtual currency custodial services and the increased use of sub-custodial relationships in the digital asset space, the New York Department of Financial Services (NY DFS) announced updated Guidance on Custodial Structures for Customer Protection in the Event of Insolvency on September 30, 2025 (2025 Guidance).

In light of the 2025 Guidance, companies that offer virtual currency custody services to customers in New York may wish to review their arrangements with any sub-custodians—particularly underlying contracts, customer disclosures, and operational practices—to ensure alignment with the 2025 Guidance and to confirm that sub-custodial relationships are structured to safeguard customer assets in line with regulatory expectations. In NY DFS’s announcement of the updated guidance, Superintendent Adrienne A. Harris noted, “As we see the use of more sub-custodial relationships in the digital asset space, this guidance provides additional clarity on how those relationships should be governed.”

The 2025 Guidance focuses on virtual currency custody services (which include storing, holding, or maintaining custody or control of virtual currency on behalf of others) and replaces NY DFS’s prior Guidance from January 2023 on the same subject, effective immediately. The scope of the 2025 Guidance, like the prior guidance, applies to BitLicensees (entities engaged in virtual currency business activity in New York that are subject to NY DFS’s BitLicense Regulation) and New York State limited purpose trust companies that engage in virtual currency business activity. It is intended to clarify standards and practices that, in NY DFS’s views, will help ensure these entities “are structuring their asset custody framework to protect the interests of their customers.” Specifically, the 2025 Guidance seeks to provide additional direction with regard to sub-custodians by providing the following:

(i) clarifications on NY DFS’s expectations with respect to acceptable sub-custodians and additional expectations for sub-custodial service agreements,
(ii) guardrails for relevant sub-custodians to structure their asset custody framework,
(iii) clarifications on NY DFS’s expectations with respect to permissible uses of customer assets, and
(iv) a continued emphasis on sound custody and disclosure practices.

Wilson Sonsini advises fintech companies on how to strategically navigate the virtual currency requirements of New York and other states, along with the novel, evolving legal issues raised by crypto. Please do not hesitate to contact Jess Cheng or any member of the Payments practice for more information.