On June 8, 2022, the New York State Department of Financial Services (“NYDFS”) released regulatory guidance applicable only to payment stablecoins that are backed by the U.S. Dollar and issued by entities regulated by NYDFS. The guidance comes one day after Senators Kirsten Gillibrand (D-N.Y.) and Cynthia Lummis (R-Wyo.) released a bill calling for dramatic changes to federal regulation of the cryptocurrency industry (see our quick analysis here) and less than a week after New York’s legislature passed two bills aimed at crypto regulation. Focusing on three criteria—redeemability, reserves, and attestation—the NYDFS stablecoin guidance is intended to ensure that payment stablecoin issuers remain solvent so holders of those payment stablecoins can timely exercise their right to redeem. This guidance does not address a stablecoin’s trading price and does not mandate that the issuer take any active measures to ensure the price of the asset on markets.

Redeemability

NYDFS seeks to protect consumers by ensuring holders of a payment stablecoin are able to redeem it “in a timely fashion at par for the U.S. dollar.” According to the guidance, “timely” means not more than 2 full business days after a holder exercises their right, but NYDFS retains discretion to extend the deadline where “timely redemption would likely jeopardize the Reserve’s asset-backing or the orderly liquidation of Reserve assets[.]”  Issuers are required to obtain prior approval from NYDFS of their redemption policies before onboarding holders. One reoccurring theme throughout the redeemability standards is disclosure – NYDFS mandates disclosure of any net fees, the meaning of “redemption,” and the required timeliness to effectuate redemption.

Reserve and Attestation

According to the guidance, stablecoins must be backed by a reserve composed of U.S. Treasuries, such as treasury bills with no more than three months to maturity, notes, and/or bonds. These reserves, however, are subject to NYDFS-approved “requirements concerning overcollateralization,” and must be held in custody with U.S. state or federally chartered depository institutions or NYDFS-approved asset custodians. Additionally, the payment stablecoin issuer’s reserve accounts are subject to monthly attestation by an independent Certified Public Accountant (“CPA”). The CPA attestation must validate that all NYDFS Reserve requirements were met and that the value of the Reserve covered the amount of outstanding stablecoin units. The value of the reserve assets are subject to daily valuation. Issuers must make all monthly attestation reports performed by a CPA available to the public.

While these standards are comprehensive, NYDFS noted it will also consider other standards and requirements when approving a payment stablecoin.  NYDFS may impose obligations regarding cybersecurity, network design, and evaluate the issuer’s Bank Secrecy Act/anti-money laundering compliance .

In sum, NYDFS will look at the totality of risks and management controls in deciding whether to grant approval to new stablecoin issuers. Currently, the Paxos Trust Company’s USDP & BUSD, Gemini Trust Company’s GUSD, and GMO-Z.com Trust Company’s ZUSD are all approved under the guidance.