August 14, 2022

Volume XII, Number 226

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August 12, 2022

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August 11, 2022

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New York Releases Stablecoin Guidance

On June 8, the New York State Department of Financial Services (DFS) released its Guidance on the Issuance of U.S. Dollar-Backed Stablecoins meant to set foundational criteria for USD-backed stablecoins issued by DFS-regulated entities on the issues of redeemability, assets reserves and attestations about such reserves. Here are some of the highlights from the guidance.

  • Backing and Redeemability. The stablecoin issuer must adopt clear policies that are approved by the DFS and confer the right to redeem units of the stablecoin in a timely fashion. The stablecoin must be backed by a reserve of assets, meaning the 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.

  • Asset Reserves. The assets that back the stablecoin must be segregated from the proprietary assets of the issuing entity, and must be held in custody by a FDIC-insured institution or a custodian approved by the DFS.

  • The Asset Reserves are subject to an examination by a licensed CPA.

DFS notes that the risks connected to these factors are not the only risks DFS considers. 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; BSA/AML and sanctions compliance; consumer protection; safety and soundness of the issuing entity; and the stability/integrity of the payment system.

Putting It Into Practice: This stablecoin guidance should be viewed in light of the recent regulatory activity regarding stablecoins. Recently, Treasury Secretary Janet Yellen presented the Financial Stability Oversight Council Annual Report before the Senate Banking Committee about the need for sensible stablecoin legislation (we have previously discussed this report here). Additionally, the President’s Working Group on Financial Markets recently published a report and held a hearing calling for sensible stablecoin legislation (we have previously discussed the President’s Working Group (PWG) report and congressional hearing on stablecoins here and here).

This guidance makes clear that a DFS-regulated issuer of a stablecoin is responsible for understanding and complying with all applicable laws and regulations, and other state or federal regulatory agencies.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 165
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Moorari Shah Bankruptcy Lawyer Sheppard Mullin Law Firm
Partner

Moorari Shah is a partner in the Finance and Bankruptcy Practice Group in the firm's Los Angeles and San Francisco offices. 

Areas of Practice

Moorari combines deep in-house and law firm experience to deliver practical, business-minded legal advice. He represents banks, fintechs, mortgage companies, auto lenders, and other nonbank institutions in transactional, licensing, regulatory compliance, and government enforcement matters covering mergers and acquisitions, consumer and commercial lending, equipment finance and leasing, and supervisory examinations,...

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A.J. S. Dhaliwal Bankruptcy Attorney Sheppard Mullin Washington DC
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A.J. is an associate in the Finance and Bankruptcy Practice Group in the firm's Washington, D.C. office. 

A.J. has over a decade of experience helping banks, non-bank financial institutions, and other companies providing financial products and services in a wide range of matters including government enforcement actions, civil litigation, regulatory examinations, and internal investigations.

With a diversified regulatory, compliance, and enforcement background, A.J. counsels financial institutions in matters involving...

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Gabriel is an Associate on the Telecom team and the Co-Lead Associate on the Blockchain and Digital Assets team in the firm’s Washington, D.C. office. He is a Blockchain Law Professional as Certified by the Blockchain Council.

At Sheppard Mullin, Gabriel assists the Telecom team in all aspects of communications law and regulation including, satellites, spectrum, 5G implementation, media companies, and new technologies. He assists the Blockchain and Digital Assets team in legal issues relating to the use of blockchain technology, social media, internet, video games, online gambling,...

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