As concerns over Tether (USDT) have mounted, a steady stream of stablecoins has emerged, but most lack formal regulatory backing. On September 10, 2018, the New York State Department of Financial Services (DFS) changed the landscape by approving two trust companies—Gemini Trust and Paxos Trust—to issue their own dollar-pegged stablecoins: Gemini Dollar (GUSD) and Paxos Standard (PAX). Both tokens run on the ERC20 standard and are claimed to be fully backed 1:1 by U.S. dollars held at banks located in the United States and insured by the Federal Deposit Insurance Corporation (FDIC).
A Milestone for Regulated Stablecoins
DFS Superintendent Maria T. Vullo stated: “As the financial technology marketplace continues to evolve, New York is committed to fostering innovation while ensuring responsible growth. 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.” The approvals mark the first time stablecoins have received an official license from a U.S. state financial regulator, known for its rigorous Bitlicense regime. Gemini, founded by the Winklevoss twins, and Paxos, led by CEO Charles Cascarilla, both expressed gratitude toward DFS.
Compliance and Seizure Risks
As part of the approval process, DFS required both firms to adhere to anti-money laundering (AML), anti-terrorist financing (CTF), anti-fraud, and consumer protection standards. Furthermore, each company must prominently display terms and conditions on their websites warning that: any stablecoin and the fiat currency available upon redemption may be forfeited if used for illegal activity; any stablecoin may be subject to forfeiture to or seizure by law enforcement pursuant to a legal order or process; and any stablecoin or fiat currency that has been frozen, forfeited, or seized may become wholly and permanently unusable and may be destroyed. This disclosure introduces an element of state confiscation risk, yet it also provides a layer of trust for institutional players seeking regulatory clarity.
Charles Cascarilla, CEO and co-founder of Paxos, commented: “This is a very exciting time and we thank the DFS and Superintendent Vullo. 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.” The launch of GUSD and PAX comes at a time when Tether’s reserve transparency remains under scrutiny. The regulatory endorsement may attract institutional investors, though the government seizure clause has sparked debate within the crypto community over decentralization versus compliance. DFS may evaluate additional stablecoin projects in the future, setting a precedent for U.S. stablecoin regulation.