This week, the New York Department of Financial Services (“NYDFS”) announced approval for its two licensed FinTech-oriented state trust companies, Gemini Trust Company LLC and Paxos Trust Company LLC (formerly known as itBit Trust Company), to offer a new type of cryptocurrency referred to as a Stablecoin. The Gemini Dollar (“GUSD”) and Paxos Standard Token (“PAX”) are designed to be collateralized one-for-one by the U.S. dollar, and will permit payment for other assets traded on blockchains with instant settlement and minimal transaction costs. As described, GUSD and PAX are issued only when a customer of Gemini or Paxos deposits a corresponding amount of U.S. dollars, which are always held in a reserve account by the issuer on behalf of GUSD and PAX holders. At all times under this framework, Gemini or Paxos are required to hold, in a fiduciary capacity, at least as much fiat currency as GUSD and PAX in circulation.
As background, Cleary Gottlieb has served as counsel to Paxos throughout its history, from its formation and licensing through development of its trading and settlement platforms. The new announcement represents the third substantive expansion of the approved activities of Paxos in recent months. In June, the NYDFS authorized Paxos to offer trading in Ether, Litecoin, Lumens, and Bitcoin Cash, and in May, the NYDFS authorized Paxos to operate a permissioned blockchain platform for the settlement of gold bullion
GUSD and PAX are built on the Ethereum platform using smart contracts that follow the ERC-20 protocol, so anyone with an Ethereum wallet can purchase and transfer them. By pegging their value to the U.S. dollar, Gemini and Paxos intend to provide their customers with a cryptocurrency that can be used as a means of exchange, rather than as a store of value. The peg to the U.S. dollar is intended to smooth the volatility often associated with popular cryptoassets, such as Bitcoin and Ethereum, and to overcome a major hurdle in the ability to use them to purchase goods and services. These stability features are likely to make speculative investment in GUSD and PAX unlikely, in contrast to the other cryptoassets such as Bitcoin currently traded on the exchanges operated by Gemini and Paxos.
The approvals also demonstrate the willingness of the NYDFS to permit the offering and secondary market trading of cryptoassets that state-regulated exchanges themselves develop. To date, all approvals for Gemini and Paxos have permitted secondary market trading of cryptoassets developed by third parties and that had been available for trading on less-regulated (or unregulated) platforms. In granting these approvals, however, the NYDFS imposed a number of conditions on Gemini and Paxos designed both to ensure that GUSD and PAX retain their one-to-one peg to the U.S. dollar and to prevent market manipulation and illegal use of GUSD and PAX.