The guidance outlines the “baseline criteria” for backing and redeemability of stablecoins and sets up the department’s expectations in relation to stablecoin reserves and independent audits.
According to Superintendent Adrienne Harris, it “creates clear criteria for virtual currency companies looking to issue USD-backed stablecoins in New York.”
More specifically, the document states that any stablecoin “must be fully backed by a reserve of assets” at the end of every business day. Stablecoin issuers, in turn, are required to have “clear, conspicuous redemption policies” approved in advance in writing by the DFS that would give a stablecoin holder the right to redeem it “in a timely fashion at par for the U.S. dollar.”
Furthermore, the stablecoin operators are required to separate the assets in their reserves from their proprietary assets, as well as custody them “with U.S. state or federally chartered depository institutions and/or asset custodians.”
The reserves must be held in asset categories such as U.S. Treasury bills, reverse repurchase agreements fully collateralized by U.S treasury bills, notes, as well as deposit accounts at U.S. state or federally chartered depository institutions.
The reserves backing the stablecoins are also subject to independent audits conducted by a U.S.-licensed Certified Public Accountant (CPA) on a monthly and yearly basis.
The guidance specifies that it applies only to stablecoin issuers regulated by the DFS and limited purpose trust charter holders operating in the state of New York.
Currently, these include the Paxos Trust Company, the issuer of the Pax Dollar (USDP), Binance USD, the issuer of the Binance USD (BUSD), Gemini Trust Company, the issuer of the Gemini Dollar (GUSD), and GMO-Z.com Trust Company, the issuer of the Zytara Dollar (ZUSD).
Regulators tighten scrutiny of stablecoins
The release of this guidance follows the collapse of the TerraUSD (UST) stablecoin last month, something the department also mentioned in its press release, referring to it as “recent events in the stablecoin market and the virtual currency space.”
In light of those events, NYDFS also stressed that the requirements as to redeemability, the reserves, and attestations “are not the only requirements DFS places or may place on the issuance of stablecoins, and the risks connected to these factors are not the only risks DFS 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,” reads the guidance.
The publication of the documents comes hot on the heels of Japan becoming the first nation in the world to pass a law clarifying the legal status of stablecoins.
Under the new legislation, which was passed last week and comes into effect in 2023, stablecoins must be linked to the yen or another legal tender and guarantee holders the right to redeem them at face value.
This was followed by a bipartisan bill unveiled by the U.S. Senators Cynthia Lummis (R-Wy) and Kirsten Gillibrand (D-NY) earlier this week that proposed a new approach to regulating stablecoins.
If passed, it would oblige stablecoin issuers to maintain a 100% reserve and ensure that stablecoin owners are able to exchange the coins for an equivalent dollar amount at all times.
The bill would also clear a regulatory path for banks and other financial institutions to issue and use stablecoins for payments.