Stablecoins Now Under Full Radar of Financial Authorities

Terra’s LUNA/UST collapse earlier in May created a tsunami in the crypto world prompting regulators to speed up creation and adoption of new stablecoin legislation. Thus, according to the New York regulator, the new rules published on Wednesday (June 8, 2022) seek to emphasize new provisions concerning dollar-pegged stablecoins issued by The New York Department of Financial Services (DFS)-regulated entities. The guidance focuses on backing and redeemability, reserve requirements, and independent audits.

For backing and redeemability, the DFS said stablecoins should be explicitly backed by a reserve of assets. Also, the issuer should have clear redemption policies approved by the New York watchdog and will be required to segregate assets in the reserve from their proprietary holdings. The reserve’s assets should comprise the U.S. Treasury Bills, reverse repurchase fully collateralized by such bills, notes, or bonds.

In addition, assets in the reserve “must be held in custody with U.S. state or federally chartered depository institutions and/or asset custodians.” The guideline also stipulates that the reserves must undergo a monthly audit by the U.S. licensed independent Certified Public Accountant (CPA).

The DFS noted that the rules do not limit the power of the regulator. An excerpt from the guideline said:

“DFS may, at any time and in its sole discretion, prohibit or otherwise limit a stablecoin’s issuance or use before or after a DFS-regulated Issuer begins issuing the stablecoin and may require that any such Issuer delist, halt, or otherwise limit or curtail activity with respect to any stablecoin.”