New York Department of Financial Services Announces New Guidance for Stablecoins

The New York State Department of Financial Services (DFS) has announced new guidance on dollar-based stablecoins which are issued by firms regulated by the DFS. The guidance does not apply to USD-backed stablecoins listed, but not issued, by DFS-regulated entities.

Superintendent Adrienne A. Harris commented today:

“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. 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.”

In a sign of industry support, Circle CEO Jeremy Allaire tweeted:

“Very thoughtful and focused stablecoin policy from New York, which will further unlock the power of dollar digital currency for financial applications and broader capital markets utility.”

Circle is the issuer of USDC, the second most popular dollar-backed stablecoin following Tether, which recently saw a temporary de-pegging from the dollar even though the company attests to the fact it is fully reserved.

Dan Burstein, US General Counsel for Paxos – one of the firms impacted by the guidance issued the following statement:

“The NYDFS is a first-mover in digital assets and has been successfully regulating stablecoins for four years. Their vision has created a safe place for innovators like Paxos to create exciting products with consumer protections always in mind. We’re proudly the first NYDFS-regulated Trust company for digital assets and the first to achieve regulatory approval for stablecoin issuance. We believe these guidelines provide a strong foundation for the regulatory oversight of stablecoin issuers and tokens moving forward. Paxos is committed to upholding the highest standards of operations and compliance, and thus already adheres to these principles. Our USDP and BUSD stablecoins have been regulated by NYDFS for nearly four years and are the safest US dollar-backed assets available on the market today.”

The DFS guidance includes the following:

  • Backing and Redeemability: The stablecoin must be fully backed by a Reserve of assets, meaning that the market value of the Reserve is at least equal to the nominal value of all outstanding units of the stablecoin as of the end of each business day. The issuer of the stablecoin must adopt clear, conspicuous redemption policies, approved in advance by DFS in writing, that confer on any lawful holder of the stablecoin a right to redeem units of the stablecoin from the Issuer in a timely fashion at par for the U.S. dollar.
  • Reserve Requirements: The assets in the Reserve must be segregated from the proprietary assets of the issuing entity and must be held in custody with U.S. state or federally chartered depository institutions and/or asset custodians.
    • The Reserve must consist of the following assets: U.S. Treasury Bills acquired by the Issuer three months or less from their respective maturities, Reverse repurchase agreements fully collateralized by U.S. Treasury bills, U.S. Treasury notes, and/or U.S. Treasury bonds on an overnight basis, subject to DFS-approved requirements concerning over-collateralization, and Deposit accounts at U.S. state or federally chartered depository institutions, subject to DFS-approved restrictions.
  • Independent Audits: The Reserve must be subject to an examination of management’s assertions at least once per month by an independent Certified Public Accountant (CPA) licensed in the United States and applying the attestation standards of the American Institute of Certified Public Accountants.

The reserve requirements would effectively eliminate any potential for liquidity demands or a possible “run on the bank” scenario that has undermined other aspiring stablecoins.

DFS added that it looks at a range of potential risks before authorizing a regulated virtual currency entity to issue a stablecoin, including risks relating to cybersecurity and information technology; network design and maintenance and related technology and operational considerations; Bank Secrecy Act/anti-money-laundering and sanctions compliance; consumer protection; safety and soundness of the issuing entity; and the stability/integrity of the payment system, as applicable. DFS may impose requirements on a stablecoin arrangement to address any of these risks, or any other risks, consistent with DFS’s statutory mandate and the laws and regulations relevant to the circumstances.

DFS indicated that it may impose different requirements on any particular stablecoin arrangement backed by the USD and will require clear and conspicuous disclosure of any such different requirements.

Today, the DFS-regulated stablecoins to which this Regulatory Guidance applies are:

(i) the USDP and BUSD, issued by Paxos Trust Company, LLC;

(ii) the GUSD, issued by Gemini Trust Company, LLC;

(iii) the ZUSD, issued by Trust Company, Inc.

This will apply to any additional U.S. dollar-backed stablecoins that DFS-regulated entities seek to issue.

DFS will consider the guidance when there is a request for coin issuance or seeking approval for a coin self-certification policy.


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