**[New York Department of Financial Services Updates Crypto Custody Guidelines, Emphasizing Isolation of Client Assets from Custodian Bankruptcy Risks]** The New York State Department of Financial Services (NYDFS) has released updated guidelines for licensed virtual currency custodians (VCEs). The core requirement of the guidelines is that custody structures must ensure the beneficial ownership of digital assets always remains with the client, particularly in cases where the custodian faces bankruptcy, ensuring client assets are protected. NYDFS stated that this update addresses the surge in demand for virtual asset custody services from institutional and retail clients, as well as the increasingly complex "sub-custody" relationships within the industry. The new guidelines explicitly prohibit custodians from engaging in activities that could compromise client ownership, such as rehypothecation or unsecured lending of client assets, without explicit permission and informed consent. Additionally, stricter due diligence, contractual terms, and disclosure requirements have been imposed on custodians utilizing sub-custody arrangements. The guidelines aim to provide greater clarity and confidence for clients while encouraging licensed entities to review their custody structures and client agreements. This updated 2025 guideline is now in effect, replacing the previous version from January 2023.