New York Financial Watchdog Issues Stablecoin Guidelines, Calls for Reserve Requirements

The New York State Department of Financial Services released new rules on Wednesday for licensed cryptocurrency firms that issue stablecoins, calling for reserve requirements and independent monthly audits.

The guidelines are for current holders of the BitLicense, the business license for virtual currency businesses operating in New York State, or limited purpose trust charter holders who issue stablecoins backed by fiat currency.

The agency said it expects stablecoins to be fully backed by a pool of assets and redeemable by investors. It also set out the requirements for those reserves, including the various assets that the reserves should include and a specification that they must be “separated from the issuing entity’s own assets”. Issuers must also submit to monthly audits by an independent accountant.

Regulators have focused on stablecoins in recent months due to the lack of transparency around the trading of these virtual assets and the reserves that support them, as well as the reliance of market participants on them to enable trading in other cryptographic protocols.

The meteoric rise of the Terra Network’s dollar-pegged stablecoin, TerraUSD, followed by its rapid collapse that resulted in $60 billion in losses for investors has also sharpened regulators’ attention to the space.

TerraUSD is different from the stablecoins discussed in guidance from New York regulators on Wednesday — it’s a decentralized algorithmic stablecoin rather than run by a single entity and backed by fiat currency — but the saga has raised the profile of these cryptos -assets and has damaged the reputation of the industry.

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“We are now making it transparent and clear to the market that these are expectations for our stablecoin issuers at all levels,” said Adrienne Harris, Superintendent of the New York State Department of Financial Services on “Crypto World.” CNBC. [Watch CNBC’s interview with Harris at 3 p.m. ET on Crypto World.]

“DFS has been regulating the space for a long time, but it is a fast-paced, fast-moving space…so it behooves us as a prudential regulator to make sure we keep pace with innovation in this space. space,” she said.

New York’s Toughest Regulator

Adrienne Harris, Superintendent of the New York State Department of Financial Services (DFS), speaks during an interview in New York, U.S., Wednesday, May 25, 2022.

Christophe Goodney | Bloomberg | Getty Images

The DFS, which regulates all financial services and products in New York, created the BitLicense in 2015 to regulate crypto businesses.

Harris said the stablecoin guidelines build on VOLT, a transformation initiative she launched to address delays in regulatory processes for agency-supervised virtual currency businesses. VOLT stands for Vision, Operations, Leadership and Technology, and the initiative includes a series of measures to address each of them.

The superintendent said she is committed to making the agency’s systems and processes smoother as the crypto industry evolves. This includes upgrading regulator technology, using blockchain analytics, and hiring talent at a rapid pace.

“Bringing this talent is going to help us expedite the licensing process without sacrificing the regulatory rigor it requires, and then help us keep abreast of the space as it continues to move.” said Harris.

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Yet, with Harris barely six months into the job, many wonder if New York will welcome the crypto industry. New York Mayor Eric Adams has announced plans to make the city a crypto hub.

Critics from New York’s financial regulator have also pointed out that the state risks losing talent to other tech hubs like Miami or Austin or states with crypto-forward regulatory initiatives like Wyoming. However, Harris said demand for BitLicenses has not diminished and she noted that the agency has already issued three licenses this year.

“Half of venture capital investments in the cryptocurrency space in 2021 were in New York-based, regulated companies,” Harris said. “So we see that having clear rules of conduct, having strong regulations attracts business and attracts talent to New York. And that’s our job, to make sure that we have those protections in place and that we want that talent and those companies to be here under that rubric. ”

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