Key Takeaways:

  • DFS proposes to replace its existing patchwork approach to payment stablecoins with a single streamlined regulation. Proposed Part 202 to Title 23 NYCRR would establish a comprehensive regulatory regime for authorized payment stablecoin issuers, formally withdrawing the superintendent’s 2022 Industry Letter and superseding potentially inconsistent supervisory agreements.
  • Existing authorized issuers do not need to seek reapproval but must comply with all substantive requirements within 12 months of the effective date, which is tied to the effective date of the GENIUS Act.
  • The proposed regulation introduces formal bank-style capital requirements, a categorical prohibition on self-custody of reserves, codified liquidation triggers, and a minimum insured deposit floor for large issuers.

Overview

On June 9, the New York State Department of Financial Services (DFS) released a draft for public comment of a proposed new Part 202 to Title 23 of the New York Codes, Rules and Regulations (the Proposed Regulations), which would materially enhance New York’s existing regulatory requirements for payment stablecoins and would align them with the federal framework under the Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act). DFS has supervised stablecoin issuers for several years through limited-purpose trust company charters, entity-specific supervisory agreements, and the superintendent’s June 8, 2022 Industry Letter on U.S. dollar-backed stablecoins.

The Proposed Regulations aim to (i) align New York’s requirements with those of the GENIUS Act, (ii) replace the existing patchwork approach with a single streamlined regulation by formally withdrawing the 2022 guidance and superseding any contrary provisions within existing supervisory agreements, and (iii) create additional regulatory requirements for payment stablecoin issuers.

What Would Change — Requirements Beyond the Current DFS and Federal Frameworks

While much of the Proposed Regulations codify practices already expected of DFS-supervised stablecoin issuers, several provisions impose obligations that are new relative to both the existing DFS regime and the GENIUS Act baseline:

  1. Formal Bank-Style Capital Requirements. The most significant addition is a requirement that authorized issuers maintain common equity tier 1 and additional tier 1 capital commensurate “with the level and nature of all risks to which the authorized payment stablecoin issuer is exposed,” including off-balance sheet exposures. This requirement establishes capital reserve requirements that are at least as stringent as the Office of Comptroller of the Currency’s proposed 12 C.F.R. § 15.41, which would establish the reserve requirements for payment stablecoin issuers under the GENIUS Act. The prior DFS framework expected general financial soundness but did not impose tiered capital standards on non-depository trust companies outside of what was negotiated in each issuer’s supervisory agreement with DFS. Under the Proposed Regulations, each issuer must also maintain an “operational backstop” comprising a segregated liquid asset pool to meet short-term liquidity needs during business disruptions. Failure to satisfy capital or backstop requirements for two consecutive quarters would trigger mandatory liquidation and permanent cessation of issuance.
  2. Prohibition on Self-Custody of Reserves. Under the existing regulatory framework, reserve custody arrangements have historically been governed by supervisory agreements with DFS and DFS-issued guidance. The Proposed Regulations categorically prohibit self-custody of reserve assets; all such reserves must be held exclusively at an eligible financial institution other than the issuer. Most notably, if the chosen custodian is not an insured depository institution, prior superintendent approval is required. Issuers that currently self-custody any portion of reserves or that house these reserves with non-insured institutions (e.g., broker-dealers, trust companies, etc.) would need to restructure those arrangements.
  3. Minimum Insured Deposit Floor for Large Issuers. The Proposed Regulations also impose a quantitative requirement that issuers with outstanding issuance value of $25 billion or more must maintain at least 0.5 percent of reserves (capped at $500 million) in insured deposits or shares at an insured depository institution, measured daily. This requirement could potentially be extremely burdensome, as access to sufficient insured deposits may prove to be difficult.
  4. Codified Liquidation Triggers for Reserve Shortfalls. While DFS has always had authority to intervene when issuer reserves are deficient, the Proposed Regulations codify aggressive automatic triggers, such as immediate issuance halt upon any shortfall and mandatory full liquidation and fee-free redemption if the shortfall persists for 15 consecutive business days. The superintendent would retain discretion to extend this period or to order earlier liquidation if compliance appears unlikely.
  5. Cybersecurity at the “Class A” Tier. All issuers must comply with cybersecurity regulations imposed by 23 NYCRR Part 500 at the “class A company” level, which is the most demanding tier. Although DFS-supervised entities were already subject to Part 500, mandating class A status represents a heightened baseline, particularly for smaller issuers.
  6. BSA/AML Certification to the Superintendent. Each issuer must submit a compliance certification within 180 days of approval (or of the effective date for existing issuers) and annually thereafter. Failure may result in revocation of DFS approval to issue payment stablecoins. The prior regulatory framework required Bank Secrecy Act/anti-money laundering (BSA/AML) compliance but did not mandate a formal certification with revocation as a specified consequence.
  7. Redemption Policy Formalization. The Proposed Regulations require a maximum two-business-day redemption window and require that the issuer’s redemption policy be submitted to the superintendent for prior approval.

Request for Comments

DFS has requested that members of the industry submit comments on the Proposed Regulations. Below are a few areas where the Proposed Regulations exercise discretion beyond the federal floor set forth by the GENIUS Act:

The Proposed Regulations:

  • Create a 15-Business-Day Liquidation Trigger. This timeline is extremely compressed for large issuers and could produce fire-sale dynamics from temporary settlement or custodian disruptions. A more appropriate time period may be 30 or 60 business days, and DFS should implement a remediation-plan mechanism before liquidation is ordered.
  • Prohibit Self-Custody of Reserves and Limit Custody to Insured Banking Institutions. The blanket prohibition may create concentration risk by forcing dependence on a small number of third-party custodian banks. Additionally, access to sufficient insured deposits may prove to be difficult as stablecoin reserves tend not to be able to access pass-through status for FDIC insurance. A more prudent framework may include an alternative methodology for demonstrating appropriate segregation and controls to self-custody certain levels of reserves and a requirement to maintain the maximum insurance coverage reasonably possible.
  • Create a Mandatory Liquidation Period. Irreversible mandatory liquidation after two consecutive quarters of noncompliance leaves no formal opportunity to submit a capital restoration plan. DFS may wish to consider a three- or four-quarter cure window with mandatory plan submission after the first deficient quarter, preserving the superintendent’s broad enforcement authority as a backstop.

Next Steps

Affected issuers should begin compliance gap analyses immediately and evaluate whether to submit comments during the rulemaking period. Lowenstein Sandler has significant experience advising stablecoin issuers, crypto asset platforms, and other financial institutions on regulatory matters, including DFS supervision and the evolving federal digital asset framework. Please contact one of the listed authors of this Client Alert or your regular Lowenstein Sandler contact if you have any questions regarding the proposed regulation or its implications for your business.