The New York Department of Financial Services (NYDFS), the agency responsible for regulating virtual currency and BitLicenses, approved “Stablecoin” on September 10, 2018. This price-stable cryptocurrency is being offered by the Winklevoss brother’s Gemini and Paxos Trust Company, one of the exclusive few companies allowed to operate cryptocurrency in the state of New York. Cameron Winklevoss regarded the new cryptocurrency as “the world’s first regulated stablecoin.” The stablecoins will be pegged to the U.S dollar and not subject to the extreme volatility cryptocurrencies like Bitcoin experince.
What is Stablecoin?
Stablecoin is the name for a cryptocurrency not subject to extreme fluctuations in price changes such as Bitcoin. Stablecoin applications gained popularity early in 2018 as Bitcoin, the biggest cryptocurrency in circulation, saw a it’s pinnacle of $19,190 from to a $6,900 trough. This level of extreme volatility is not becoming of any currency competing with fiat currency. In order to reach stability, stablecoins are pegged to stable assets to retain their purchasing power. Critics of cryptocurrency have stated that there isn’t much else to do with Bitcoin and other virtual currency except for trading them, as their price fluctuations yeild a return on original investment. Stabilizing a cryptocurrency gives it more legitimacy as a form of currency tender not subject to inflation. Pegging Stablecoin to the U.S dollar offers the security of a central bank. A few companies have developed a stable cryptocurrency such as Basecoin, Dai stablecoin (Wyre Inc., MakerDAO), and Tether.
Stablecoin is the only crypto-asset so far to legitimize with the merit of NYDFS approval. Tyler Winklevoss, CEO of Gemini, stated that, “To date, there has been no trusted and regulated digital representation of the U.S. dollar on the blockchain.” Stable cryptocurrency are a signal of a maturing Blockchain technology that could one day be trusted and even used as legal tender. Maria T. Vullo, Superintendent for the DFS, added “As the financial technology marketplace continues to evolve, New York is committed to fostering innovation while ensuring responsible growth.”
“We are excited to bring the Gemini dollar to market,” continued Tyler Winklevoss, “a stablecoin that combines the creditworthiness and price stability of the U.S. dollar with blockchain technology and the oversight of the NYDFS.”
New York DFS Regulations for Stablecoin
The New York DFS is one of the strictest state agencies for cryptocurrency in the U.S, so much to only have approved 5 BitLicenses to date since their implementation in 2015, and the Winklevoss brother’s companies with a charter. It drove away other exchanges and wallets, including Kraken, which has expressed criticism for state regulators crippling the virtual currency economy of New York before even starting. The DFS press release listed the “Comprehensive and Rigorous” standards Stablecoin must follow,
- Ensure that authorized stablecoins are fully exchangeable for a U.S. dollar, with conditions to ensure monitoring and recordkeeping.
- Implement, monitor and update effective risk-based controls and appropriate BSA/AML and OFAC controls to prevent the Gemini Dollar or Paxos Standard Token from being used in connection with money laundering or terrorist financing.
- Implement, monitor and update effective risk-based controls to prevent and respond to any potential or actual wrongful use of stablecoin, including but not limited to its use in illegal activity, market manipulation, or other similar misconduct, as required by DFS’s February 7, 2018, “Guidance on Prevention of Market Manipulation and Other Wrongful Activity”.
- Compliance with DFS’s transaction monitoring and cybersecurity regulations.
- Post terms and conditions in a prominent location on both Gemini’s and Paxos’s respective websites, and in any other form or manner required by DFS, that warns consumers that:
- Any stablecoin and/or the fiat currency available upon redemption of any stablecoin may be forfeited if the stablecoin has been, or is being used for, illegal activity
- Any stablecoin may be subject to forfeiture to, or seizure by, a law enforcement agency in the event that there is a legal order or other legal process
- Any stablecoin or fiat currency available upon exchange of stablecoin that has been subject to freezing, forfeiture to or seizure by a law enforcement agency, and/or subject to any similar limitation on its use, may be wholly and permanently unrecoverable and unusable and may, in appropriate circumstances, be destroyed
- Maintain policies and procedures for consumer protection and to promptly address and resolve customer complaints.
“These approvals demonstrate that companies can create change and strong standards of compliance within a strong state regulatory framework that safeguards regulated entities and protects consumers,” boasted Vullo.
“This is a very exciting time and we thank the DFS and Superintendent Vullo,” said Charles Cascarilla, CEO and co-founder of Paxos. “With Paxos Standard, we hope to enable a truly frictionless, global economy by offering a token that is stable, fast, redeemable, audited, and most importantly, approved and regulated. This is a digital asset that can be trusted.”
Felix Shipkevich is a principal of Shipkevich PLLC. His practice focuses on providing counsel to FinTech and financial services firms, including financial technology, payments and emerging digital currency space. He has spoken at national panels in the money transmitter space and payments industry. Mr. Shipkevich’s payments practice has brought him into contact with money transmitter registration requirements in all fifty U.S. States.
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