The NY Department of Financial Services (DFS), which oversees regulated crypto companies in the state, on June 8, released formal guidelines for U.S. dollar-backed stablecoin issuers.
The DFS has laid down requirements, standards, and controls for stablecoins issued in NY since 2018. This includes requirements for redeemability of stablecoins, the reserves backing the stablecoins, and the attestation of such reserves. These guidelines currently apply to Paxos Trust Company’s USDP and Binance USD (BUSD), Gemini-issued GUSD, and ZUSD issued by GMO-Z.com.
It is important to note that the new guidelines apply only to U.S. dollar-pegged stablecoins issued by regulated entities in N.Y. that fall under the oversight of the DFS.
Under the new guidelines, stablecoins must be 100% backed by reserves at the end of every business day. However, the approved list of assets that can be used as reserves is limited to U.S. Treasury Bills, repo agreements fully collateralized by treasury bills, notes or bonds, government money market funds, and cash deposits. The DFS also has the authority to place limits on the amount of reserves that can be held in certain approved assets.
The guidelines also state that the reserves must be separated from the proprietary assets of the stablecoin issuers. And the reserves must be held by the issuers in a U.S. state or federally chartered depository institution with deposits insured by the Federal Deposit Insurance Corporation (FDIC) or with asset custodians approved by the DFS.
Stablecoin issuers are also required to get monthly and yearly attestations of their reserves from approved chartered accountants, as per the new guidelines. Gemini, Paxos, and other stablecoin issuers will also need to furnish these attestation reports to the DFS and the public.
The most important requirements set down by the guidelines involve the redeemability of stablecoins.
Stablecoin issuers need to adopt “clear, conspicuous redemption policies” that enable investors to redeem their holdings at any time. This means stablecoin issuers need to ensure that all redemption requests are processed within two business days after receiving the request. However, the DFS may extend the redemption period under certain circumstances.
Paxos noted in a tweet that it already complies with these guidelines and that other issuers should follow suit.
New @NYDFS stablecoin guidelines make it clear all #DFS regulated stablecoin issuers must protect customer reserves as bankruptcy remote & held in segregated accounts. As a #NYS Chartered Trust Company #Paxos already does this. We believe all #issuers should meet these standards. https://t.co/VVBX7yvjdE
— Paxos (@PaxosGlobal) June 8, 2022
The DFS, wherever it deems necessary, may impose additional requirements on stablecoins issuers.
Gemini, Paxos, and GMO-Z.com have three months to comply with the set guidelines.
Stablecoin regulation on the rise after UST crisis
The move follows countries such as South Korea, Japan, and the U.K., which have come up with stablecoin regulations of their own in the wake of the Terra-LUNA collapse. Even the U.S. unveiled a draft crypto bill this week.
Terra’s algorithmic stablecoin TerraUSD (UST) lost its peg to the U.S. dollar in early May. Its sister token, LUNA, which was supposed to help UST maintain its peg, started declining soon after, leading to a complete collapse of the ecosystem.
Amid the crisis, all major cryptocurrency prices fell sharply, and investors lost millions as $45 billion was wiped off the TerraUSD and LUNA market cap within a week.
With the vast scale of the devastation, stablecoins are receiving all the focus from regulators. In South Korea, lawmakers have proposed a self-regulatory system to oversee the listing and delisting of cryptocurrencies on exchanges. Japan has passed a stablecoin bill to ensure investor protection, and the U.K. has suggested amendments to existing laws to bring stablecoins within the regulatory realm.
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