On June 8, the New York State Department of Financial Services (NYDFS) issued new “Guidance on the Issuance of U.S. Dollar-Backed Stablecoins,” establishing a first-of-its-kind state standards for USD-backed stablecoins issued by entities subject to regulation by the NYDFS. Informal policies have been in place since 2018, but NYDFS Superintendent Adrienne A. Harris believes this new guidance “creates clear criteria for virtual currency companies looking to issue USD-backed stablecoins in New York.”
There are three main components to the new guidance:
- Backing and Redeemability: New York-licensed crypto entities may only offer stablecoins “fully backed” by a reserve of assets and redeemable by holders within two business days, such 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 stablecoin issuer must adopt “clear, conspicuous redemption policies, approved in advance by DFS in writing,” which grant holders a right to redeem stablecoin tokens from the issuer (as opposed to through a third party) “in a timely fashion at par for the U.S. dollar,” less any fees. The guidance includes model language for customer terms, including definitions of redemption and what “timely” means under normal and extraordinary circumstances.
- Reserve Requirements: The assets held in reserve must be segregated from the proprietary assets of the issuing entity and held by: (1) a U.S. state or federally chartered depository institutions; and/or (2) an asset custodian, approved in advance and in writing by NYDFS. Stablecoin reserves must be held in specific asset categories, including government money-market funds and deposit accounts at U.S. state or federally charted depository institutions, as well as reverse repurchase agreements fully collateralized by U.S. Treasury bills, notes, or bonds on an overnight basis, subject to the regulator’s approval.
- Attestation Requirements: The reserves are subject to examination by the regulator at least once per month by an independent, certified public accountant (CPA) who is approved in writing in advance by the NYDFS, including the CPA’s engagement letter. The regulator requires both monthly and annual attestations that conform to the below requirements:
- Independent Attestations: The CPA must attest to management’s assertions as of the last business day of the period covered by the attestation and as of at least one randomly selected business day during the period that includes the following: (1) the end-of-day market value of the reserve, both in aggregate and broken down by asset class; (2) the end-of-day quantity of outstanding stablecoin units; (3) whether the reserve was, at these times, adequate to fully back all outstanding stablecoin units, including reconciling items; and (4) whether all NYDFS-imposed conditions on the reserve assets have been met. Copies of the report must be produced to NYDFS in writing, not more than 30 days after the end of the period covered by the attestation.
- Annual Reporting Requirements: The CPA must attest to management’s assertions concerning the effectiveness of the internal controls, structure, and procedures for compliance with the monthly attestation requirements. Copies of the report must be produced to NYDFS in writing, not more than 120 days after the end of the period covered by the report.
The guidance notes these are not the only regulatory requirements placed on the issuance of stablecoins and that NYDFS will consider a number of other risks before authorizing a regulated entity to issue a stablecoin, including risks related to AML compliance. The NYDFS guidance applies to four newly issued stablecoins from three New York-licensed crypto entities: Pax Dollar (USDP) and Binance USD (BUSD), issued by Paxos; Gemini dollar (GUSD), issued by Gemini; and Zytara (ZUSD) issued by GMO-Z. Also, NYDFS notes that the guidance does not apply to USD-backed stablecoins that are listed, but not issued, by DFS-regulated exchanges.
The collapse of the Terra ecosystem has accelerated efforts to regulate stablecoins. NYDFS said in the announcement that it has been “in close contact with New York State-regulated virtual currency entities in light of recent events in the stablecoin market and the virtual currency space.” Moreover, the NYDFS issuing this new guidance comes on the heels of Sen. Kirsten Gillibrand (D-NY) and Sen. Cynthia Lummis (R-WY) introducing the Responsible Financial Innovation Act, which requires all issuers of payment stablecoins to publicly disclose the assets backing them and to be wholly backed and redeemable by high-quality liquid assets.