On June 8, 2022, New York’s Department of Financial Services released interpretive guidance on the “Issuance of U.S. Dollar-Backed Stablecoins.” The guidance applies to entities that issue stablecoins under DFS supervision, and addresses three broad topics—redeemability, reserve requirements, and monthly attestation by an independent CPA firm.
As to redeemability, the guidance provides that a stablecoin must be fully backed by a “Reserve” of assets, meaning that the market value of the Reserve is at least equal to the nominal value of all outstanding units of the stablecoin as of the end of each business day. Further, the guidance provides that the issuer of the stablecoin must adopt “clear, conspicuous redemption policies,” approved in advance by DFS in writing, that confer on any holder of the stablecoin a right to redeem units of the stablecoin from the issuer in a timely fashion at par — which the guidance clarifies means at a 1:1 exchange rate for the US dollar, “net of ordinary, well-disclosed fees.” These redemption policies must clearly disclose the meaning of “redemption” and the required timing of “timely” redemption, or must expressly adopt the DFS’s default terms, including that redemption must occur not more than two full business days (“T+2”) after the business day on which the issuer receives a redemption order.
With respect to requirements for the “Reserve,” the guidance specifies that the assets in the Reserve must be segregated from the proprietary assets of the issuing entity, and must be held in custody with (i) US state or federally chartered depository institutions with deposits insured by the FDIC or (ii) asset custodians, approved in advance in writing by DFS. The Reserve assets must be held at these depository institutions and custodians for the benefit of the holders of the stablecoin, with appropriate titling of accounts. Further, the Reserve may consist only of the following assets:
- US Treasury bills acquired by the Issuer three months or less from their respective maturities;
- Reverse repurchase agreements fully collateralized by US Treasury bills, US Treasury notes, or US Treasury bonds on an overnight basis, subject to DFS-approved requirements concerning overcollateralization;
- Government money-market funds, subject to DFS-approved caps on the fraction of Reserve assets to be held in such funds and DFS-approved restrictions on the funds, such as a minimum percentage allocation to direct obligations of the Government of the United States and reverse repurchase agreements on such obligations; and
- Deposit accounts at US state or federally chartered depository institutions, subject to DFS-approved restrictions such as (i) percentage-of-Reserve or absolute-dollar-value caps on the assets to be deposited at any given depository institution and (ii) limitations based on DFS’s conclusions concerning the risk characteristics of particular depository institutions, taking into consideration the amounts reasonably needed to be held at depository institutions to meet anticipated redemption demands.
Regarding attestation, the guidance specifies that the Reserve must be subject to an examination of management’s assertions, at least once per month by an independent CPA licensed in the United States and applying the attestation standards of the American Institute of Certified Public Accountants, where such CPA and such CPA’s engagement letter has been approved in advance in writing by DFS. In each of these attestations, the CPA must attest to management’s assertions of the following as of the last business day of the period covered by the attestation and as of at least one randomly selected business day during the period: (i) the end-of-day market value of the Reserve, both in aggregate and broken down by asset class; (ii) the end-of-day quantity of outstanding stablecoin units; (iii) whether the Reserve was, at these times, adequate to fully back all outstanding stablecoin; and (iv) whether all DFS-imposed conditions on the Reserve assets have been met. A stablecoin issuer must also obtain an annual attestation report by an independent CPA licensed in the United States and applying the attestation standards of the AICPA, attesting to management’s assertions concerning the effectiveness of the internal controls, structure, and procedures for compliance with the requirements described above. Again, such CPA and such CPA’s engagement letter must be approved in advance in writing by DFS. Each of these attestation reports must be made available to the public. The guidance notes that the requirements as to redeemability, the Reserve, and attestations are not the only requirements DFS may place on the issuance of stablecoins, and the risks connected to these factors are not the only risks DFS considers. The guidance indicates that DFS looks at a range of potential risks before authorizing a regulated virtual currency entity to issue a stablecoin, including risks relating to cybersecurity and information technology; network design and maintenance and related technology and operational considerations; Bank Secrecy Act/anti-money-laundering (“BSA/AML”) and sanctions compliance; consumer protection; safety and soundness of the issuing entity; and the stability/integrity of the payment system, as applicable. DFS reminds stablecoin issuers that it may impose requirements on a stablecoin arrangement to address any of these risks, or any other risks, consistent with DFS’s statutory mandate and the laws and regulations relevant to the circumstances.