The New York Department of Financial Services (DFS) has just released “Guidance on the Issuance of U.S. Dollar-Backed Stablecoins” for all DFS-regulated entities (BitLicense holders). The DFS says the guidance should act as the baseline set of requirements that companies within New York State that have either issued, or would like to issue, dollar-backed stablecoins must follow.
“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,” said Adrienne A. Harris, the Superintendent at the Department of Financial Services.
NYDFS stablecoin guidance
The guidance defines three criteria for dollar-backed stablecoin businesses:
- The backing and redeemability of dollar-backed stablecoins
- The asset reserves of dollar-backed stablecoins
- The attestation, or independent audits, of dollar-backed stablecoins
When it comes to backing, the guidance says, ”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.”
Regarding redeemability, the guidance says that the stablecoin provider must have a clear redemption policy that allows the stablecoin owner to exchange their stablecoin 1:1 with the U.S. dollar and receive their USD payout no later than two business days after they initiate the redemption.
The criteria around asset reserves require stablecoin issuers to separate their reserve assets from their proprietary assets. Each must be held in a state or federally chartered depository institution with deposits insured by the Federal Deposit Insurance Corporation or an asset custodian that has been approved in writing by the DFS.
The reserve asset section also defines which assets the DFS has given the stamp of approval. That list includes 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, government money-market funds, and deposit accounts at U.S. state or federally chartered depository institutions.
And when it comes to attestation, the DFS mandates that the stablecoin issuer must be audited by an independent Certified Public Accountant at least once per month.
Digital currency risk and regulation
The guidance that the NYDFS has released is likely to be the first of many pieces of regulation we see about stablecoins. The collapse of the Terra Luna stablecoin $UST, and the de-pegging of several stablecoins that took place shortly after have caused regulatory agencies to spring into action to mitigate the risk consumers are exposed to in the digital asset markets.
The NYDFS dollar-backed stablecoin only applies to BitLicense holders that have issued dollar-backed stablecoins, which at present are Paxos Trust Company, the issuer of the Pax Dollar (USDP), and Binance USD (BUSD); Gemini Trust Company, the issuer of the Gemini Dollar (GUSD); and GMO-Z.com Trust Company, the issuer of the Zytara Dollar (ZUSD).
The NYDFS also highlights that the guidance that they released is not all-encompassing and that they also look at risks related to “cybersecurity and information technology; network design and maintenance and related technology and operational considerations; Bank Secrecy Act/anti-money-laundering (“BSA/AML”) and sanctions compliance; consumer protection; safety and soundness of the issuing entity; and the stability/integrity of the payment system,” when evaluating a DFS regulated entity that offers a dollar-backed stablecoin. Because of that, the DFS may impose other requirements on the issuer on a case-by-case basis.
The guidance does not apply to other stablecoins that may be listed by DFS-regulated entities. Still, there is a strong chance that we see regulatory agencies piggyback off of the criteria that the NYDFS has put out when they create legislation and regulatory frameworks related to stablecoins.
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