New York's top financial regulator has issued new guidance for stablecoins weeks after the dramatic collapse of TerraUSD.
The state's Department of Financial Services, which has long been a first mover in crypto regulations, said Wednesday it is the first in the U.S. to set comprehensive standards around stablecoins, an asset class that has caught the attention of regulators worldwide.
“Leveraging our years of expertise in the space, our regulatory guidance today creates clear criteria for virtual currency companies looking to issue [U.S. dollar]-backed stablecoins in New York," said DFS Superintendent Adrienne Harris in a press release.
The department has been licensing and setting minimum disclosure requirements for dollar-backed stablecoins since 2018. The guidance published Wednesday offers more comprehensive standards, according to the state DFS.
New York-licensed crypto entities can only offer stablecoins that are fully backed by a reserve of assets and redeemable by holders within two business days. The guidance also set rules around what types of assets can be used to back stablecoins, including U.S. Treasury bills less than three months from maturity and deposits in state and federally charted accounts. The coins can also be backed by reverse repurchase agreements fully collateralized by U.S. Treasury bills, notes or bonds on an overnight basis, subject to the regulator's approval.
The reserves must be audited once per month by an independent accountant, with that report released to the public within 30 days.
The guidance applies to any U.S. dollar-backed stablecoins issued by cryptocurrency firms holding a New York BitLicense or limited purpose trust charter that allows digital asset transactions. The regulatory scheme wouldn't embrace an algorithmic stablecoin like TerraUSD, which makes the state's move emblematic of the challenge regulators face in addressing decentralized finance.
Institutions behind asset-backed stablecoins have sought in recent weeks to clarify the difference between their offerings and the risk of algorithmic stablecoins.
Nonetheless, the collapse of the Terra ecosystem clearly has accelerated efforts to regulate stablecoins as a whole. DFS said in the announcement that it has been "in close contact with New York State-regulated virtual currency entities in light of recent events in the stablecoin market and the virtual currency space."
Sen. Kirsten Gillibrand said Wednesday that the TerraUSD collapse "absolutely" influenced the approach her crypto regulation bill with Sen. Cynthia Lummis took toward stablecoins.
"This bill is a comprehensive approach to how to create safety and soundness in this industry, how to create transparency, accountability and how to create consumer protections, because of everything that's happened in the last several weeks," Gillibrand said at an event hosted by the Washington Post.
The Lummis-Gillibrand bill, filed Tuesday, requires all issuers of payment stablecoins to publicly disclose the assets backing them and to be completely backed and redeemable by high-quality liquid assets.
New York launched its BitLicense for firms that facilitate crypto transactions in 2015, placing it as a leading regulator for the industry. Harris, who took over DFS last fall, has promised to address some industry grievances with the BitLicense, including its lengthy review process. But she has insisted New York can maintain strong consumer safeguards while still attracting investment in the industry, often citing how New York startups attracted more crypto venture capital dollars than those of any state last year.
The New York DFS guidance would apply to any newly issued stablecoins from state-regulated entities and four active coins: Pax Dollar (USDP) and Binance USD (BUSD), issued by Paxos; Gemini dollar (GUSD), issued by Gemini; and Zytara (ZUSD) issued by GMO-Z.
In a statement Wednesday, Paxos general counsel Dan Burstein said the company believes "these guidelines provide a strong foundation for the regulatory oversight of stablecoin issuers and tokens moving forward."
Ben Brody and Tomio Geron contributed to this report.