NYDFS Says ‘Dual Banking System’ Should Oversee Stablecoins

According to New York’s financial regulator, the best system for regulating stablecoins already exists.

Testifying before the House Financial Services Committee Wednesday (April 19), New York Department of Financial Services Superintendent (NYDFS) Adrianne A. Harris said federal stablecoin legislation should build on the existing “dual banking” system.

“The dual banking system takes advantage of the comparative strengths of federal and state regulators,” Harris said, per prepared testimony provided by the NYDFS. “Federal regulators are able to comprehensively address macroprudential considerations and establish foundational consumer and market protections.”

States, on the other hand, can “act more nimbly to respond to industry developments and support responsible innovation given their ability to modernize regulations more quickly and leverage their more immediate understanding of consumer needs.”

The committee’s hearing came days after the House introduced legislation designed to bring stablecoins deeper into the regulatory fold and potentially the broader global financial system.

A new 73-page draft bill — the first major piece of crypto legislation so far this year — proposes giving the Federal Reserve’s board of governors oversight of nonbank entities and digital asset firms looking to issue stablecoins.

The draft also calls for a two-year moratorium on the creation and issuance of algorithmic stablecoins as well as those backed by other cryptocurrencies. According to the draft, penalties for anyone issuing stablecoins without regulatory approval include prison time of up to five years, along with a $1 million fine.

In her testimony, Harris said the NYDFS has not approved any algorithmic stablecoins.

“The collapse of the algorithmic stablecoin, Terra, was well-reported in the news last year and had a ripple effect across the cryptocurrency ecosystem, ultimately leading to the bankruptcy of FinTech firms Celsius and Voyager (neither of which was licensed or chartered in New York) and hedge funds such as Three Arrows Capital,” said Harris.

However, she added that the NYDFS’ “strict coin listing requirements” helped dull the impact of the Terra collapse for New Yorkers in a way that other jurisdictions couldn’t claim, as Terra had not been approved by DFS for custody or listing in New York state.

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