New York Department of Financial Services Stablecoin Tips

On June 8, 2022, the New York Department of Financial Services issued interpretative guidance on “Issuance of U.S. Dollar-Backed Stable Coins.” The guidelines apply to entities that issue stablecoins under the supervision of DFS and address three main topics: refundability, reserve requirements, and monthly attestation by an independent CPA firm.

Regarding redeemability, the guidelines state that a stablecoin must be fully backed by a “pool” of assets, meaning that the market value of the pool is at least equal to the face value of all units. in circulation of the stablecoin at the end of each business day. In addition, the guidelines provide that the issuer of the stablecoin must adopt “clear and visible redemption policies”, approved in advance by DFS in writing, which grant any holder of the stablecoin the right to redeem units of the stablecoin from from the issuer in a timely manner at par – which the guidelines clarify means at a 1:1 exchange rate to the US dollar, “net of ordinary and well-disclosed fees”. Such redemption policies must clearly state the meaning of “redemption” and the timing required for “timely” redemption, or must expressly adopt DFS’s default terms, including that redemption must not occur more than two full business days (“T+2”) after the business day on which the issuer receives a redemption order.

With respect to “reserve” requirements, the guidelines specify that reserve assets must be segregated from the investee entity’s own assets and must be held by (i) federally chartered depository institutions or U.S. government with FDIC-insured deposits or (ii) asset custodians, previously approved in writing by DFS. Reserve assets should be held with these custodian and custodian institutions for the benefit of the stablecoin holders, with appropriate titration of accounts. In addition, the reserve can only be made up of the following assets:

  • US Treasury Bills acquired by the Issuer within three months of their respective maturities;

  • Reverse repurchase agreements fully collateralized by U.S. Treasury Bills, U.S. Treasury Bills, or U.S. Treasury Overnight Bonds, subject to DFS-approved overcollateralization requirements;

  • 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 bonds of the United States government and the reverse repurchase agreements of these bonds; and

  • Depository accounts at U.S. federally or state chartered depository institutions, subject to DFS-approved restrictions such as (i) reserve percentage or absolute dollar value caps on assets to be deposited at a deposit and (ii) limitations based on DFS’s findings regarding the risk characteristics of particular depository institutions, taking into account amounts reasonably necessary to be held by depository institutions to meet prepayment demands.

With respect to attestation, the guidelines state that the Reserve must undergo a review of management assertions, at least once a month, by an independent CPA licensed in the United States and applying the standards certificate from the American Institute of Certified Public Accountants, when this CPA and this CPA engagement letter has been previously approved in writing by DFS. In each of these certifications, the CPA must certify management’s assertions regarding the following matters as of the last business day of the period covered by the certification and on at least one randomly selected business day during the period: (i ) the end of – the daily market value of the reserve, both overall and broken down by asset class; (ii) the end-of-day quantity of Stablecoin units in circulation; (iii) whether the reserve was, at such times, sufficient to fully guarantee all stablecoins in circulation; and (iv) whether any conditions imposed by the DFS on the Reserve Assets have been satisfied. An issuer of stablecoins must also obtain an annual attestation report by an independent CPA licensed in the United States and apply the AICPA attestation standards, attesting to management’s assertions regarding the effectiveness of internal controls, the structure and procedures for compliance with the requirements described. above. Once again, this CPA and the engagement letter of this CPA must be approved in writing by DSF beforehand. Each of these attestation reports must be made available to the public. The guidelines note that requirements for redeemability, reserve, and attestations are not the only requirements that DFS may impose on the issuance of stablecoins, and risks related to these factors are not the only risks that DFS considered. The guidelines state that DFS reviews a range of potential risks before allowing a regulated virtual currency entity to issue a stablecoin, including cybersecurity and information technology risks; network design and maintenance and related technology and operational considerations; Compliance with the Bank Secrecy/Anti-Money Laundering Act (“BSA/AML”) and sanctions; consumer protection; the safety and soundness of the issuing entity; and the stability/integrity of the payment system, if applicable. DFS reminds stablecoin issuers that it may impose requirements on a stablecoin arrangement to address any of these risks, or any other risks, in accordance with DFS’s statutory mandate and applicable laws and regulations. circumstances.

Copyright © 2022, Hunter Andrews Kurth LLP. All rights reserved.National Law Review, Volume XII, Number 160

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