On September 10, 2018, the New York State Department of Financial Services (NYDFS) issued a press release announcing that it had authorized Gemini Trust Company (Gemini) and Paxos Trust Company (Paxos) to each offer a stable value cryptocurrency known as a "stablecoin."

The value of most cryptocurrencies fluctuates and can often be volatile. In its recent run-up, the value of bitcoin rose from $3,603 on September 22, 2017, to a high of $19,343 on December 16, 2017, and is now worth roughly $6,600. Stablecoins are pegged to the value of an underlying asset, such as gold or a fiat currency like the US dollar, which gives them a stable value. The stablecoins approved by the NYDFS, the Gemini Dollar (GUSD), and the Paxos Standard (PAX), both of which launched on September 10, are pegged 1:1 to the US dollar.

The Gemini and Paxos stablecoins are built on the Ethereum blockchain network in accordance with Ethereum's ERC-20 standard for smart contracts. These smart contracts have been audited and verified by independent security firms.

Dollars can be converted 1:1 for stablecoins on the Gemini and Paxos platforms. The stablecoins can be withdrawn from those platforms and transferred on the Ethereum network to any person or entity with an Ethereum account. The transferee can then convert the stablecoins back to dollars on the Gemini and Paxos platforms.

All stablecoins, whether held on the Gemini or Paxos platforms or in circulation on the Ethereum network, are backed by an equivalent deposit of dollars at a US bank. These deposits are examined monthly by independent public accounting firms to verify the 1:1 peg.

The Gemini and Paxos stablecoins thus combine one of the key features of a cryptocurrency – instantaneous transaction settlement – with the stability of a dollar-denominated bank transaction. A dollar payment through the international banking system can only be processed on days when banks are open for business and during the hours they are open. For example, if a US buyer wanted to a pay a Korean seller on a Friday evening in New York, the payment might not settle in the seller's bank account until close of business on Tuesday in Korea. If Monday or Tuesday were bank holidays in the US or Korea, the transaction might even take another two days to settle. By making the payment on the Gemini or Paxos platform through the Ethereum network, the dollar payment would settle instantaneously for both buyer and seller at the moment it is made on Friday evening.

Both Gemini and Paxos hold limited purpose trust company charters from the NYDFS to operate virtual currency exchanges. The NYDFS stablecoin approvals are conditioned on stringent requirements that include:

The best-known stablecoin, Tether (USDT), also pegged to the US dollar, has recently come under scrutiny over the adequacy of its dollar reserves and the opacity of the process by which Tether is created and maintained. As a result, Singapore's DigiFinex cryptocurrency exchange decided to replace Tether with TrustToken's TrueUSD, another stablecoin pegged to the US dollar.

For more information on virtual currency regulation, see Practice Note, Virtual Currency Regulation: Overview and Virtual Currency and Digital Asset Regulatory Tracker.