New York State - First U.S. Regulator to Issue Guidance for DFS Regulated Dollar Backed Stablecoins - News Brief

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Introduction

Today, June 8, 2022, the New York State Department of Financial Services (DFS) released its guidance for U.S. dollar-backed stablecoins issued by DFS-regulated entities. The Superintendent of the notoriously rigid DFS, Adrienne A. Harris, claims it is the "first U.S. Financial Regulator to issue stablecoin expectations to virtual currency industry" [Harris, A. Press Release - June 8, 2022 - SUPERINTENDENT ADRIENNE A. HARRIS ANNOUNCES NEW DFS REGULATORY GUIDANCE ON THE ISSUANCE OF U.S. DOLLAR-BACKED STABLECOINS. (Accessed Jun 8, 2022). By way of introductory remarks, she stated:

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.

[Id].

New Regulatory Guidance for USD-Backed Stablecoins

This new guidance specifically addresses three subject matter areas concerning USD-backed stablecoins. The new guidance addresses the following:

• Backing/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 (the “Issuer”) 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" [Id].
• Asset 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 overcollateralization, and Deposit accounts at U.S. state or federally chartered depository institutions, subject to DFS-approved restrictions" [Id].
• 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 ('AICPA')" [Id].

The guidance applies only to issuers regulated by the DFS and limited purpose trust charter holders operating in the state. At present, they are the Paxos Trust Company, issuer of the Pax Dollar (USDP) and Binance USD (BUSD); Gemini Trust Company, issuer of the Gemini Dollar (GUSD); and GMO-Z.com Trust Company, issuer of the Zytara Dollar (ZUSD). The guidance does not apply to other stablecoins that may be listed by DFS-regulated entities.

[Andersen, D. New York state releases guidance for issuing dollar-backed stablecoins. (Accessed June 8, 2022)].

It should be noted that these new guidance items are not the sole requirements imposed by the DFS for the issuance of stablecoins, nor is it an exhaustive lists of the risks it considers.

DFS 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 (“BSA/AML”) 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.

[Harris. Supra].

It is stressed in the Press Release that these items of guidance are only 'baseline requirements', and the "DFS 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" [Id].

Superintendent Harris notes: "Given how fast the virtual currency industry is evolving, DFS is using all the regulatory tools available to keep pace with industry, make data-driven policy decisions, and proactively respond to the virtual currency market" [Id].

Final Thoughts

The New York state BitLicense, as the DFS license is known, is notoriously difficult to obtain and has come under criticism from New York City Mayor Eric Adams. Some crypto firms moved out of the state when it was introduced in 2015. The DFS intends to triple the size of its virtual currency team this year as part of its program to 'address delays in regulatory processes and ensure operational excellence across the Virtual Currency unit'.

[Andersen. Supra. See, also Nagoda, K. Why It Is So Damn Hard To Trade Cryptocurrency in New York State. (Accessed June 8, 2022)].

This guidance move, coupled with the Legislative move to ban PoW Crypto Mining (currently on the Governor's desk for consideration) demonstrates New York's restrictive posture toward cryptocurrency. When will the NY Legislature and Regulatory agencies realize that by acting in such a restrictive manner they are pushing the crypto industry from the state causing the loss of jobs and commerce. It is beyond time for this state to wake up and embrace the change innovation brings.

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