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The New York State Department of Financial Services ("DFS") authorized two companies to offer price-stable cryptocurrencies ("stablecoins") pegged to the U.S. dollar.
According to DFS, the two companies – Gemini Trust Company LLC and Paxos Trust Company LLC – were each required to undergo a rigorous application process and were able to meet stringent criteria for offering these products, which require:
- that the authorized stablecoins are fully exchangeable for a U.S. dollar;
- that each company implement, monitor and update effective risk-based controls to prevent products from being used in connection with money laundering or terrorist financing, and to prevent violations of sanctions promulgated by the Office of Foreign Assets Control;
- that each company implement, monitor and update effective risk-based controls to prevent and respond to the wrongful use of stablecoin, including its use in illegal activity, market manipulation or other similar misconduct, as per earlier DFS guidance;
- full compliance with DFS's transaction monitoring and cybersecurity regulations;
- visible warnings to consumers regarding certain risks related to stablecoin; and
- the enactment of consumer protection policies and procedures, and a process for resolving consumer complaints.
Each of Gemini Trust Company LLC and Paxos Trust Company LLC were previously issued limited purpose trust company charters by DFS to operate virtual currency exchanges. In each case, the Gemini Dollar and the Paxos Standard will be backed one-to-one by fiat U.S. dollars held at U.S.-based banks that are insured by the FDIC.
Commentary / Joseph V. Moreno
This is a significant step for the industry in terms of making it more likely cryptocurrency will start being used in everyday transactions. A dollar-pegged cryptocurrency will combine the transaction speed and efficiency of not having to rely on the traditional banking system, the stability of the ethereum blockchain, and the peace of mind that these "stablecoins" will not suffer from price fluctuations. It is perhaps especially meaningful coming from DFS, which is widely seen as highly skeptical of this technology. While the industry as a whole will no doubt continue to have ups and downs, we will likely look back at this development as having considerable impact in bringing cryptocurrency into the mainstream.
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