Breaking: Biggest Regulatory Action On Stablecoin Security

After the Terra crash erupted last month, all the focus was on stablecoins. Many people called for regulatory control over this category of cryptocurrencies. On Wednesday, a step forward on stablecoin regulation came in the form of regulatory guidance from a New York regulator.

Foundational Criteria For Regulating Stablecoins

Adrienne Harris, superintendent of the New York state department of financial services (DFS) issued new regulatory guidance in this regard. The guidance sets foundational criteria for U.S. Dollar backed stablecoins issued by DFS-regulated entities.

Harris said in a statement,

“Since DFS approved the first USD-backed stablecoins for issuance in New York in 2018, our regulated entities have had to meet conservative reserve requirements and provide routine attestations to protect consumers and ensure the stability of the coins issued.”

She explained that the guidance creates criteria for virtual currency companies looking to issue USD-backed stablecoins in New York. The aspect of stablecoin’s full support of a reserve of assets has been stressed upon in the regulatory guidance.

Reserve Assets To Back All Stablecoins

The criteria on stablecoin regulation needs the token be fully backed by a reserve of assets. This means the reserve’s market value is at least equal to nominal value of all outstanding units of the stablecoin.

Also, the reserve assets must be clearly differentiated from proprietary assets of the issuing entity. Importantly, the assets must be held in custody with U.S. state or federally chartered depository institutions and/or asset custodians.

The guidance also demarcated the various types of assets to be stored in the reserve. Subject to conditions, U.S. treasury bills, reverse repurchase agreements, U.S. Treasury notes, and/or U.S. Treasury bonds are allowed.

“The reserve must be subject to an examination of management’s assertions once per month by an independent Certified Public Accountant.”

To ensure incidents like the Terra collapse do not repeat, the framework also requires the reserve to be reviewed regularly. The purpose of the guidance is to set forth baseline requirements that will generally apply to stablecoins backed by Dollar. Although this regulatory framework applies only to New York based entities, this precedent could well be replicated elsewhere.