Yesterday, the New York State Department of Financial Services (NYDFS) issued regulatory guidance for stablecoins issued by DFS-regulated entities. It wants to see clarity on the redeemability of the digital currency and imposes requirements on the backing assets and collateral audits.
Perhaps the biggest requirement is the restriction on the collateral that backs the stablecoin. Commercial paper is out, perhaps triggered by concern over the Tether stablecoin, which claims to have significant commercial paper holdings. Instead, it restricts the assets to short term Treasury Bills, overnight repurchase agreements (repos) backed by Treasuries, Treasury money market funds, and U.S. chartered bank accounts.
While most stablecoins are redeemable, some issuers aren’t keen to deal with the public, so they will only redeem via intermediaries or market makers. The NYDFS says holders should be able to redeem stablecoins “from the Issuer in a timely fashion at par.”
It also requires a monthly CPA attestation and imposes a 30-day time limit on this. Some stablecoin transparency reports appear a couple of months or more in arrears.
The new guidance was said to apply to Paxos, which issues the Paxos dollar (USDP) and Binance stablecoin (BUSD), Gemini’s GUSD and GMO-Z’s ZUSD.
Last February, the largest stablecoin issuer, Tether, was banned from New York state. In the case of the second largest one, USDC, its issuer Circle has many U.S. licenses, including from NYDFS. However, the company is headquartered in Boston, which may be considered its issuance jurisdiction.
The announcement seems to have been triggered partly by the collapse of Terra algorithmic stablecoin and, more likely, Tether briefly losing its peg as the statement refers to ‘recent events’ in the stablecoin market.
Even though Tether is banned from New York, it doesn’t comply with any of the requirements because:
- redemption is via third parties
- less than half of its collateral is the type NYDFS stipulates
- its attestations are quarterly, by a non-US accountant, and always late.
A hedge fund has even taken a bet on Tether losing its peg. However, the Tether issuers could be sitting on significant profits from investing the collateral in relatively high risk assets for years. So they may or may not have additional funds to battle a de-pegging attempt.