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FinTech Nostradamus

June 10, 2022

The Approaching Stablecoin Regulations

By Matthew E. Brown, Matthew B. Lerner

In the wake of the LUNA-UST collapse in which the value of UST and LUNA crashed over 99 percent over a period of days due price manipulation of the algorithmic stablecoin, the Federal Reserve and other regulators have become increasingly vocal about the potential risks of some stablecoins. 

New York State’s Department of Financial Services (NYDFS) recently issued a Regulatory Guidance concerning U.S. Dollar-backed stablecoins and the baseline criteria concerning backing and redeemability, reserve requirements, and independent audits. In its Regulatory Guidance, the NYDFS is aiming to sure up U.S. Dollar-backed stablecoins by imposing a series of requirements on companies before the agency will provide written approval for any new stablecoin. 

First, the stablecoin must be fully backed by a reserve of assets with value equal to or greater than the value of the outstanding number of stablecoin units, as measured at the end of each business day. The stablecoin issuer must also seek and obtain approval of redemption policies that give holders of the stablecoin a right to redeem the stablecoin at par for the U.S. dollar. 

Second, the assets in reserve must consist of certain U.S. Treasury Bills and must be segregated and held in custody with U.S. state or federally chartered depository institutions or asset custodians.

Third, the reserve must be subject to at least once-per monthly independent audits.

The NYDFS, like other state and federal regulators, are acting quickly to keep pace with the rapidly changing digital currency markets, and they are engaging with industry and the legislature to help make the policy choices as they move forward. As such, industry has the opportunity to play a pivotal role in properly shaping stablecoin regulations as they continue to evolve.