New York’s Financial Watchdog Fires First U.S. Shot in Race for Stablecoin Regulation

Last updated on November 17th, 2022 at 12:35 pm

On 8 June 2022, the New York State’s Department of Financial Services (DFS) issued a Regulatory Guidance on Baseline Criteria for USD-Backed Stablecoins.

The Guidance applies to entities licensed by the DFS to engage in virtual currency business activity (so-called “BitLicense”) under 23 NYCRR Part 200 or Chartered as ‘Limited Purpose Trust Companies’ under the New York Banking Law that issue U.S. Dollar-backed stablecoins under the supervision of the DFS.

In the accompanying Press Release, Superintendent Adrienne A. Harris of the DFS 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”

She further noted:

“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.”

With this Guidance, the DFS aims to set out the “baseline requirements” that will generally apply to USD stablecoins issued by DFS supervised by the DFS.

Nevertheless, as is typical of financial regulators, the DFS reserved its right to:

“impose different requirements on any particular stablecoin arrangement backed by the USD and will require clear and conspicuous disclosure of any such different requirements.”

In summary, the Regulatory Guidance sets out the following:

USD-backed stablecoins must be fully backed by a Reserve of fiat assets.
They must be redeemable in a timely fashion at par with the U.S. dollar.
The Reserve assets must be segregated from the issuer’s proprietary assets.
The Reserve assets must be held in custody by U.S. state or federally chartered depository institutions and/or asset custodians.
Only certain assets are eligible as Reserve assets, e.g., short-dated U.S. Treasury Bills, certain reverse Repos, and deposit accounts at U.S. banks.
The Reserve must be subject to monthly and yearly audits.

Following the collapse of TerraUSD, it was widely expected that regulators would take swift action. It is therefore no surprise that the DFS, as one of the few U.S. regulators to have developed any sort of framework for the crypto sector, would be the first to act.

Check out our case study piece: “Terra LUNA 99% Crash: How Did It All Go Wrong?” for more on the TerraUSD collapse.

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