On June 8, 2022, the New York Department of Financial Services (DFS) released industry guidance regarding US dollar-backed stablecoins issued by virtual currency entities regulated by DFS. The guidance, which applies to entities licensed under the state’s virtual currency (BitLicense) regulations or chartered as limited purpose trust companies under the New York Banking Law. The requirements focus on the 1) Backing and redeemability, 2) reserves and 3) independent audits appropriateness of asset reserves that back stablecoins and the ability of holders to redeem stablecoins for US dollars.
Backing and Redeemability
- DFS guidance requires a stablecoin to be “fully backed” by reserve assets. DFS will require the daily market value of reserve assets to be equal or exceed the nominal value of all outstanding units of the stablecoin.
- The issuer’s policies on redemption must be “clear” and “conspicuous,” and approved by DFS.
- Any holder of the stablecoin will have the right to redeem units of the stablecoin in a “timely” fashion (e.g., not more than two full business days at 1:1 exchange rate for the US dollar, “net of ordinary, well-disclosed fees.”
- The specific terms of “redemption” and “timely” must be defined in the issuer’s policies.
- Reserve assets must be segregated from the issuer’s proprietary assets and held with a US state or federally chartered depository institution with FDIC-insurance and/or, if approved by DFS in advance, other asset custodians.
- The DFS guidance requires that any reserve assets be limited to specified assets and consist only of 1) certain US Treasury bills, 2) reverse repurchase agreements fully collateralized by US Treasury bills, 3) government money-market funds, and 4) deposits at US state or federally chartered depository institutions.
- On a monthly basis, an independent certified public accountant (CPA) must attest to management’s assertions regarding the sufficiency of the reserve assets.
- On an annual basis, an independent CPA must also attest to management’s assertions regarding the effectiveness of internal controls and compliance with the requirements for the monthly attestations.
- All monthly and annual reports must be submitted to DFS and made public.
Other requirements and considerations
- The DFS may impose additional requirements as it sees fit.
- Risks related to cybersecurity, Bank Secrecy Act/anti-money laundering and sanctions compliance, consumer protection, safety and soundness, and the stability and integrity of the payment system may also be accessed by the DFS
- These guidelines are now in effect for new issuers that fall under the supervision of the DFS
- For existing Issuers of stablecoins currently supervised by DFS, they will have three months to come into compliance with the requirements established in the guidance.
With the demise of the Terra stablecoin UST and the general valuation decrease currently occurring across many cryptocurrencies, it is possible that other state banking departments could follow New York’s lead and expressly address regulation of stablecoins alongside regulation of virtual currency under their money transmission laws.
However, the requirements imposed by New York are more stringent than for traditional money transmission products, specifically the requirement on monthly attestations from an independent CPA regarding the sufficiency of the reserve assets.
While there have been attempts to manage stablecoins at the Federal level, the release of the New York guidance demonstrates that DFS is not waiting for action by Congress to address these concerns. As with some other recent federal proposals, (see the sFOX summary of the Lummis-Gillibrand Bill), the guidance requires issuers to maintain reserves of at least 100% of the nominal value of outstanding stablecoins in low-risk, highly liquid assets. Therefore, algorithmic stablecoins (such as TerraUSD), would not be approved for issuance by entities overseen by DFS.
The DFS stablecoins issuance guidance follows the April 2022 DFS industry letter emphasizing the importance of employing blockchain analytics tools in an effective virtual currency business compliance program. We expect DFS will continue to seek to lead on the regulation of virtual currency business activities.
Here is the link to the full June 8, 2022 NY DFS Guidance on the Issuance of U.S. Dollar-Backed Stablecoins