On Crypto Mining and NYDFS Guidance for Stablecoins

Yesterday I wrote about a crypto mining bill that is sitting on Gov. Kathy Hochul’s desk. While New York’s net zero goals are ostensibly the driving factor behind the legislation, an element of political calculus could trump climate change concerns.

According to the New York Times, Gov. Kathy Hochul’s re-election campaign has already received $40,000 from the owner of a crypto-mining plant in Massena, N.Y. FTX co-founder and billionaire Sam Bankman-Fried is spending $1 million on television ads to boost the campaign of her Lt. Gov. Antonio Delgado.

Will money, the fiat kind and not crypto, sway Gov. Hochul’s decision regarding the bill?

It is hard to tell. Either way, as I mentioned earlier, it is unlikely to have a major effect on New York’s crypto mining industry. The New York Times piece states that there are nineteen crypto mining operations in the state. It is unclear whether that figure refers to crypto miners powered by repurposed fossil fuel plants or the total figure, a majority of which are powered by renewable sources or electricity from the grid.     

NYDFS Releases Stablecoin Guidance

Meanwhile, New York’s Department of Financial Services (NYDFS) released formal guidance for stablecoin issuers today. The agency has been dealing with stablecoins since 2018. It had previously approved Paxos, a New York-based financial institution, to issue three stablecoins backed by gold and the US dollar, starting 2018.

Another stablecoin, Tether, settled with a fine of $18.5 million with the New York Attorney General (NYAG) in 2021. The NYAG’s office had charged Bitfinex, the exchange behind Tether, with commingling funds between entities. The practice meant that Tether, which claimed to be backed 1:1 with the US dollar, did not have the full amount of its promised reserves at certain instances in its history. Tether also refused to submit itself to an impartial audit and released a list of its reserve contents that raised more questions.  

The latest guidance was likely precipitated by the recent collapse of Terra’s stablecoin UST.

What Does the Guidance Contain?

The guidance released today specifies that reserve assets must be segregated from proprietary assets and placed in custody with an FDIC-insured institutions or DFS-approved asset custodians. Besides this, the agency has also specified the type of assets that can be held as backing for stablecoins. These include U.S. treasury bills, reverse repo agreements backed by US treasuries, and Government money-market funds.

The guidance also mentions periodic attestations from certified public accountants (CPAs) for reserve assets. The agency also stated that it planned to look at a “range of potential risks”, a list that includes cybersecurity and anti-money laundering-related risks, before approving stablecoin issuers. In simple words, this means that it gets to pick the winners and losers for stablecoins operating in the state.  

A formal list of requirements to issue stablecoins is a win, albeit a small one, for stablecoin issuers. It opens the door for institutions and fintech startups to issue stablecoins. While they have other use cases, stablecoins also function as money market funds that provide a safe haven of sorts to the volatility of general cryptocurrency markets. The strict reserve requirements released today also means that the department has firmly precluded the possibility of algorithmic stablecoins, similar to UST, opening shop in the state.

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