The New York DFS issues guidance for issuers of U.S. dollar-backed stablecoins

The DFS’ Guidance on the Issuance of U.S. Dollar-Backed Stablecoins (the Guidance) sets forth certain DFS requirements for U.S. dollar-backed stablecoins issued under its oversight. Its timing was clearly inspired by the recent market turmoil. It is an important development in the regulation of U.S. dollar-backed stablecoins as it is the first guidance from a state regulator. It is also important because the DFS currently regulates the issuers of three of the six largest centralized “dollar-backed” stablecoins in circulation, collectively accounting, according to our calculations, for approximately 13% of circulating U.S. dollar-backed stablecoins globally, or three of the twelve largest U.S. “dollar-pegged” stablecoins in circulation,[1] collectively accounting for approximately 12% of circulating U.S. dollar-pegged stablecoins globally.

Issuers that currently issue U.S. dollar-backed stablecoins under DFS supervision will be required to come into compliance with the Guidance by September 8, 2022, except as to the annual attestation requirements described below, with which issuers must come into compliance in a reasonable period as determined by the DFS.

Applicability and scope of the guidance

All DFS regulated virtual currency businesses are required to receive approval from the DFS for any new products, including issuing stablecoins. The Guidance applies to any U.S. dollar-backed stablecoin “issued under DFS supervision by DFS-regulated virtual currency entities,” i.e., entities licensed under 23 NYCRR Part 200 (a BitLicense) or chartered as limited purpose trust companies under the New York Banking Law.

The Guidance makes clear that these new requirements are not exclusive and reminds issuers they are still subject to regulation and oversight relating to cybersecurity and information technology; network design and maintenance and related technology and operational considerations; Bank Secrecy Act/anti-money-laundering and sanctions compliance; consumer protection; and safety and soundness.

Redeemability and policies

Redeemability

The stablecoin issuer must adopt clear, conspicuous redemption policies entitling the redeemer the right to redeem units of the stablecoin from the issuer in a timely fashion at par.

“Timely” redemption is defined in the Guidance as not more than two full business days after the business day on which the [i]ssuer receives a “compliant redemption order,” meaning the business day on which:

1. the issuer has received a redemption order; and
2. the holder or the holder’s designee has onboarded successfully with the issuer and all other conditions necessary to permit compliant redemption have been met.

Notably, the Guidance would permit the DFS to provide exceptions from the T+2 requirement “in extraordinary circumstances, where DFS concludes that timely redemption would likely jeopardize the reserve’s asset-backing requirement or the orderly liquidation of reserve assets.”

Policies

The Guidance requires stablecoin issuers to “adopt clear, conspicuous redemption policies, approved in advance by DFS in writing.” These policies must confer on “any lawful holder of the stablecoin” a right to redeem their stablecoins at par for the U.S. dollar net of “ordinary, well-disclosed fees.” While the Guidance does provide that the right of redemption may be subject to “reasonable, non-burdensome conditions, including otherwise applicable legal or regulatory requirements, such as the ability of the stablecoin holder to onboard successfully with the issuer before redeeming,” it is unclear whether this would require a stablecoin issuer with whom onboarding is limited to institutions to allow retail customers to onboard with its redemption platform.

The reserve

The Guidance provides that all stablecoins subject to the Guidance must be fully backed by a reserve of assets, meaning that the market value of the reserve must be at least equal to the nominal value of all outstanding units of the stablecoin as of the end of each business day.

The Guidance requires that the reserve:

Attestation

Under the Guidance, the reserve must be subject to a monthly report, made available to the public and delivered to the DFS within 30 days of the covered period,[2] that details an independent, U.S. licensed, certified public accountant (CPA) examination conducted by applying the attestation standards of the American Institute of Certified Public Accountants (AICPA). The DFS reserves the power to approve in advance in writing the CPA’s engagement letter.

The CPA report will be required to attest to management’s assertions as of the last business day of the covered period and as of at least one randomly selected business day during the period as to:

1. the end-of-day market value of the reserve, both in aggregate and broken down by asset class;
2. the end-of-day quantity of outstanding stablecoin units;
3. whether the reserve was, at these times, adequate to fully back all outstanding stablecoin units; and
4. whether all DFS-imposed conditions on the reserve assets have been met.

Issuers covered by the Guidance must also obtain an annual attestation report by an independent, U.S. licensed, CPA 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 of the monthly attestation. The annual attestation report must be delivered to the DFS within 120 days of the covered period, but, unlike the monthly CPA report, is not required to be made available to the public. The engagement letter covering the annual attestation report is also required to be approved in advance in writing by the DFS.