In the wake of last month’s collapse of the TerraUSD token, a broad array of regulators and government officials have attempted to introduce a legal framework around stablecoins. Recently, Japan passed comprehensive legislation around the issuance of stablecoins. In the United States, Senators Lummis (R-WY) and Gillibrand (D-NY) recently introduced a bill into the US Congress that would, among other things, set requirements for the amount of backing assets stablecoin issuers would be required to hold. 

The latest entrant is the New York State Department of Financial Services (DFS), which threw its regulatory hat in the ring by issuing public guidance on the issuance of stablecoins by its regulated entities when the stablecoins issued are backed by US Dollars (USD).

Importantly, this guidance pertains only to stablecoin issuers who are already licensed or chartered by DFS. It does not limit the listing of any kind of stablecoin by DFS licensed entities, nor does it pertain to stablecoin issuers who are not licensed by DFS. For these few DFS licensed entities, it sets standards for their USD-backed stablecoins by introducing the following three requirements:

1.  Redeemability: Noting the concern expressed in last year’s report from the President’s Working Group (PWG) regarding the potential for “runs” or “mass redemption events” on stablecoins, the DFS guidance specifies that, at issue and until they have been burned, the tokens must be “fully backed by a reserve of assets” in order to ensure the ability of a stablecoin holder to redeem that token for fiat currency. Additionally, the guidance specifies that the issuer must obtain approval  from DFS of their redemption policies, which must be clear and conspicuous and include a redemption period of no more than two full business days after receipt of a redemption order. Thus, every stablecoin issued by a DFS licensed entity must have an approved asset backing the value of that coin, and there must be a clear and well-articulated plan for how a user may redeem that coin for fiat. 

2. Backing Assets Required: DFS also has narrowed the type of assets that may be held in reserve to the following: (i) cash reserves held at US banking institutions (whether federally or state chartered), (ii) US government money-market funds, (iii) over-collateralized reverse repo agreements that are fully collateralized by US Treasuries, and (iv) US Treasury Bills with less than three months to maturity. Notably, many GAAP “cash equivalents” have not been included in this list, such as treasury notes and bonds with little time to maturity, CD’s, and most notably commercial paper. In DFS’s view, limiting the types of assets that may be held is designed to ensure the value of the stablecoins is not tied to riskier or less liquid assets whose value may fluctuate.

3. Auditing of Assets: The third section of this guidance, which was possibly less expected than the first two, requires monthly audits to be conducted by an independent CPA, which must also file an attestation based on any findings to DFS. This needs to be instituted within a “reasonable period,” and the scope of the audit should include any additional restrictions placed on the issuing entity by DFS. This independent verification of the quantity and quality of the assets is understandable from a regulator’s point of view; however, it is too soon to see what, if any, effect this potentially costly and cumbersome requirement may have on these regulated entities.

Additional Questions: 

What does this mean for issuers of US-backed stablecoins? 

For those stablecoin issuers already licensed or charted by DFS, this likely has little effect in day-to-day operations. These entities have obtained their licenses, at least in part to signal to the industry that their stablecoins are safe bets. While there may be certain backing assets currently held that will have to be replaced within the next three months, we can anticipate that they will decide to meet these additional requirements.

For unlicensed stablecoin issuers, this guidance provides clarity to the market about what is required of their competition. Recently large stablecoin issuers have made headlines promoting the makeup of their backing assets. At a time in in the crypto industry when faith in the stability of certain stablecoins is vulnerable, it will be interesting to see whether we see a greater adoption of coins like BUSD, GUSD, ZUSD, and USDP based on this clarity. 

What does this mean for exchanges looking to offer USD backed stablecoins?

All licensed/registered exchanges, whether licensed by DFS or not, have the ability to list USD backed stablecoins. However, this guidance and the actions that might be taken as a result may provide insight, and potentially confidence, into a very few number of particular coins. Whether operating a centralized exchange or a DEX, crypto markets lately have evidenced uncertainty regarding the stability of stablecoins, and therefore the long-term assurance that customers will have access to adequate liquidity could help stabilize some of that concern.

Entities licensed by DFS, whether through a BitLicense or a Limited Purpose Trust Charter, should also take into consideration this guidance when deciding what stablecoins to list on their exchange. While the guidance is clear that the requirements only pertain to stablecoins issued by licensed entities, the guidance does mention that these requirements should also be used as guidance when conducting due diligence before listing new coins. Therefore, this may necessitate the need for new approval and review procedures prior to listing.

What does this mean for issuers of non-USD backed stablecoins?

This guidance provides clarity around the regulation in place for specific stablecoins. It does not address any other type of stablecoin (for example, those backed by other currencies, commodities, other digital assets, or even algorithmic stablecoins). This guidance is a step in the right direction for those who have sought additional clarity in the space, and it may become a burden for those seeking to capitalize on uncertainty. At every level of government, officials are realizing they are no longer able to ignore virtual currency, and it is likely this is just the beginning of much more to come.


Amy serves as the Co-chair of Baker McKenzie's North American Financial Regulation and Enforcement Practice, which provides our clients with a full range of regulatory advice and enforcement counseling. Amy also serves on the steering committees of the Firm's Global Financial Services Regulatory and Global Financial Institutions Groups. Previously, Amy has served as chief litigation counsel at the US Securities and Exchange Commission's (SEC) Philadelphia regional office and managed a team of lawyers overseeing a wide variety of enforcement matters.


Jennifer Connors is a partner in Baker McKenzie's Financial Regulation and Enforcement Practice Group. She represents broker-dealers, investment advisers, alternative trading systems (ATSs), private fund managers, financial technology (FinTech) companies and other market participants on securities law and market regulation matters.


Aiden O'Leary is an associate in Baker McKenzie's Financial Regulation and Enforcement Practice Group in North America. Aiden is a regulatory lawyer with a focus on federal and state securities laws impacting the broker-dealer and investment adviser industries. Prior to joining the Firm Aiden was an attorney with the NYS Department of Financial Services, where he focused his practice on the regulation, licensing, and supervision of a wide range of financial services companies, including those engaged in virtual currency businesses activity.