New York's NYDFS Issues Guidance on Stablecoins
The state regulator has published new compliance requirements for stablecoin issuers.
Key Takeaways
- The New York Department of Financial Services has published guidance for companies in the state that issue stablecoins.
- The guidelines describe acceptable backing assets, redemption times, reserve audits, and custodial institutions.
- Stablecoins have fallen under greater regulatory scrutiny following the collapse of the TerraUSD stablecoin in May.
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The New York Department of Financial Services (NYDFS) has issued new regulatory guidance for companies that create stablecoins.
NYDFS Sets Out Guidance
The NYDFS’ guidance sets out three baseline requirements for companies that issue dollar-backed stablecoins.
First, the stablecoin must be fully backed by a reserve of assets equal to the value of the outstanding stablecoin supply at the end of each day. The issuer must also offer clear redemption policies and process redemption requests within two business days.
Second, the stablecoin’s reserve must be held in custody by a federally chartered depository institution. The reserve can only consist of US treasury bills, collateralized reverse repurchase agreements, deposit accounts, and certain other assets.
Finally, the reserve must be examined by a Certified Public Accountant each month, and the issuer must provide annual reports.
The NYDFS also made it clear that the above rules are “not the only requirements [it] places or may place on the issuance of stablecoins.” Rather, the guidance published today draws on policies that have been enforced since 2018.
The guidance applies to financial companies that do business with virtual currency and are licensed under New York banking laws. This license is also known as New York’s “BitLicense”—a fairly exclusive license held by only a few dozen firms.
Still, the rules could affect a number of notable stablecoin firms with a BitLicense, such as Circle, Paxos, and Gemini.
Stablecoin Regulation Is a Growing Trend
NYDFS is just one entity that has announced plans to regulate stablecoins in recent weeks. The Bank of England and the Japanese government have also set out new regulations over the past week.
The trend seems to be motivated in part by the collapse of TerraUSD. The failed stablecoin is now valued at just $0.01 despite attempts in May to recover and maintain a $1.00 price peg.
However, stablecoins were also a pressing topic before the TerraUSD crisis—especially within the U.S. federal government.
Treasury Secretary Janet Yellen pressed for stablecoin regulations in April, while OCC head Michael Hsu urged for a common stablecoin framework in May. Gary Gensler, head of the Securities and Exchange Commission, has also said that stablecoins could fall under his agency’s purview in 2021.
Disclosure: At the time of writing, the author of this piece owned BTC, ETH, and other cryptocurrencies.
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