Soaring Stablecoins Amid Regulatory Delays Equals Potential Hazard
In a move aimed at ensuring the stability and transparency of the digital currency ecosystem, the New York State Department of Financial Services (NYDFS) has published requirements for US dollar-backed stablecoin issuers operating in New York.
Stablecoins, digital representations of fiat currencies, commodities, or other cryptocurrencies with a fixed value, have a market value of approximately $163 billion, making them a significant subset within the crypto-ecosystem. There are roughly 200 varieties of stablecoins worldwide, each using one of three methods to stabilize their value: fiat-controlled, crypto-collateralized, or algorithmic.
The NYDFS regulations apply to three of the six largest, centralized, US dollar-backed stablecoins in circulation, accounting for approximately 13% of circulating US dollar-backed stablecoins globally. These regulations also extend to three of the 12 largest US "dollar-pegged" stablecoins, accounting for about 12% of circulating US dollar-pegged stablecoins globally.
Fiat-Controlled Stablecoins and Compliance
Fiat-controlled stablecoins maintain a reserve of fiat currency or other assets to ensure their value, but are subject to regulatory risks, transparency concerns, and governance issues. Issuers of these stablecoins must demonstrate compliance with these regulations by 8 September, 2022, except for the annual attestation, which the issuers must complete in a reasonable time period as determined by the NYDFS.
Clear, conspicuous redemption policies must be implemented for stablecoins, allowing owners to redeem stablecoin units from the issuer in a timely manner, no more than two business days from the time the issuer receives a "compliant redemption order."
Monthly and Annual Attestations
A monthly report, reviewed by a US-licensed CPA, must be produced and delivered to the NYDFS within 30 days following the end of the covered period. This report attests to the compliance of the stablecoin issuer with the regulations.
Issuers must also obtain an annual attestation report, prepared by a CPA applying the standards of the American Institute of Certified Public Accountants, attesting to the management's assertions concerning the effectiveness of internal controls, structure, and procedures for compliance with the requirements of the monthly attestation. This report must be delivered to the NYDFS within 120 days of the covered period, but does not have to be made public, as does the monthly CPA report.
Regulatory Oversight and International Cooperation
Regulations relating to stablecoins are increasingly being enforced by US and international regulators, especially in light of the TerraUSD/Luna fiasco. The US President's Working Group on Financial Markets recommends that stablecoin issuers be insured as depository institutions, custodial wallet providers be subject to federal oversight, and stablecoin issuers comply with restrictions limiting affiliation with commercial entities.
The US Treasury intends to lead efforts within the Financial Action Task Force to implement international Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) standards and oversight of domestic AML/CFT regulations.
Meanwhile, Her Majesty's Treasury (HM Treasury) in the UK plans to take legislative steps to issue or facilitate the use of stablecoins as a means of payment within the UK regulatory perimeter. The HM Treasury's report proposes amending existing electronic money and payments legislation to accommodate stablecoins, recognizing their potential to become a widespread means of payment and drive transactional efficiencies.
Stablecoins, despite their potential benefits, are not without risks. Crypto-collateralized stablecoins, for example, are backed by other cryptocurrencies and are over-collateralized due to the high volatility of the underlying assets. They are not immune to risks, as demonstrated by the $850 million in losses from Tether and Bitfinex in 2021. Algorithmic stablecoins, which are under-collateralized and rely on coded algorithms to control supply and demand, are risky as demonstrated by the depeg of TerraUSD in May 2022.
As the world continues to grapple with the implications of digital currencies, regulatory bodies are working to strike a balance between fostering innovation and ensuring stability and security for consumers.
