New York Publishes First-Ever US Stablecoin Guide

June 13, 2022
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The New York State Department of Financial Services has become the first US financial regulator to lay down foundational criteria for dollar-backed stablecoins issued by state-regulated entities.

The New York State Department of Financial Services (DFS) has become the first US financial regulator to lay down foundational criteria for dollar-backed stablecoins issued by state-regulated entities.

The state, which has earned a name for its burdensome crypto licensing framework, has now issued guidance setting out requirements for dollar-backed stablecoins in New York concerning reserves, redeemability and audits.

“Since DFS approved the first USD-backed stablecoins for issuance in New York in 2018, our regulated entities have had to meet conservative reserve requirements and provide routine attestations to protect consumers and ensure the stability of the coins issued,” said DFS superintendent Adrienne A. Harris.

“Leveraging our years of expertise in the space, our Regulatory Guidance today creates clear criteria for virtual currency companies looking to issue USD-backed stablecoins in New York.”

The guidance establishes that stablecoins must be fully backed by a reserve of assets and the market value of the reserve should be at least equal to the nominal value of all outstanding units of the stablecoin as of the end of each business day.

The assets in the reserve must be segregated from the proprietary assets of the issuer and held in custody with US state or federally chartered depository institutions or asset custodians.

The issuer must adopt clear and conspicuous redemption policies, approved in advance by DFS in writing.

In addition, the DFS establishes that the reserve must be subject to an examination at least once per month by an independent accountant.

The guidance applies only to dollar-backed stablecoins issued by New York-regulated firms that hold a BitLicense or limited purpose trust charter that allows digital asset transactions.

These stablecoins are currently USDP and BUSD issued by Paxos, GUSD issued by Gemini, and ZUSD issued by GMO-Z.com.

It, however, does not apply to stablecoins listed by DFS-regulated exchanges that are not issued by a DFS-regulated entity.

Stablecoins have been at the forefront of policymakers’ minds for almost a year now.

The market capitalisation of stablecoins has grown to $170bn as of last month, but the value-pegged assets are the key facilitator of crypto trading. As a result, last October, more than 75 percent of trading on all crypto-trading platforms occurred between a stablecoin and some other token.

In a November 2021 report, the President’s Working Group, composed of the main federal financial regulators, stressed that the lack of appropriate oversight poses risks to the payment system.

In a number of recommendations, the regulators told Congress that stablecoin issuers, such as banks, should be insured depository institutions.

Although legislators have not yet put any proposed stablecoin bills on their agenda, some experts believe the long-awaited and comprehensive crypto bill, sponsored by New York Senator Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY), may have the legs to get through Congress.

Nonetheless, the recent collapse of algorithmic stablecoin Luna has only placed more pressure on lawmakers and regulators to tackle the issue of stablecoin regulation.

It should be noted, however, that neither the New York DFS guidance nor the Lummis/Gillibrand bill addresses the issue of algorithmic stablecoins, raising the prospect that these assets may not be treated as regulated stablecoins in the short term.

Patrick McHenry (R-NC), top Republican on the House Financial Services Committee, has previously emphasised that “not all stablecoins and not all digital assets are the same, nor should they be regulated the same”.

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