On the Regulation of Stablecoin Trust Companies
By Alex C. Levine, Chief Regulatory Officer and Head of Legal for TrustToken
Background on TrueUSD’s Regulation in the United States
TrueUSD is subject to a great deal of regulation (see more of our compliance policies here). As a company operating with the goal of full transparency and legal compliance, we are happy to share how that regulation works for our users and community.
In the United States (“US”), financial regulation arises based on where an entity and its users are located as well as how the entity and its users operate. In the case of TrueUSD, as of the date of this post, its issuer, TrueCoin, LLC (“we” or “our”), does business within select states of the US in association with trust companies based in Nevada, Prime Trust LLC (“Prime Trust”) and Alliance Trust Company LLC (“Alliance Trust”). Due to this operational structure, as explained in more detail below, not only is TrueUSD’s issuer regulated at the federal level as a money services Business (“MSB”) by the Financial Crimes Enforcement Network (“FinCEN”), which is a bureau of the United States Department of the Treasury, but its trust company partners, Prime Trust and Alliance Trust, also are regulated by the Nevada Department of Business and Industry (“DBI”). FinCEN is the federal financial institution regulator charged with administering the Bank Secrecy Act (“BSA”) and associated anti-money laundering (“AML”), know your customer (“KYC”), and anti-terrorism financing regulations for the U.S. federal government.
See https://www.fincen.gov/msb-registrant-search and search for legal name: TrueCoin.
See https://fid.online.nv.gov/datamart/searchByName.do and search for company: Prime Trust or Alliance Trust.
Because of these multiple levels of regulation, we believe that TrueUSD can fairly be characterized as a “regulated” stablecoin in the US. Certain other stablecoin sponsors have a slightly different operating model and choose to operate trust companies in the State of New York. They have received explicit acknowledgment of their regulation by the New York Department of Financial Services (“NYDFS”). FinCEN and the DBI have not made any similar explicit statements promoting their status as regulators of stablecoin sponsors. Nevertheless, the regulation of TrueUSD by these regulators is no less real or in effect, as can be seen in the links above.
Regulation of Stablecoin Trust Companies
Since the launch of TrueUSD, we have developed compliance procedures to meet regulatory requirements and provide legal protections for TrueUSD customers.
Recently, the NYDFS released a statement regarding its regulation of two trust companies, Gemini Trust Company, LLC (Gemini and its stablecoin GUSD) and Paxos Trust Company, LLC (Paxos and its stablecoin PAX). As long-term supporters of the digital currency industry, we’re encouraged to see regulators engage with digital currency companies, and we applaud this step taken by NYDFS, Gemini, and Paxos.
However, this announcement has left confusion surrounding the amount of backing by US regulators for these stablecoins and the type of regulation required to operate a compliant and secure USD-backed stablecoin. While it may be obvious, as is stated at the beginning of this post, it needs to be reiterated that the statements made by NYDFS pertain only to those entities actually registered and doing business in the State of New York, such as Gemini and Paxos. The TrueUSD escrow accounts operated by Prime Trust and Alliance Trust are regulated by state and federal authorities, but they are not registered in or doing business in New York. Therefore, the fact that the NYDFS regulates certain stablecoin operators in New York does not make stablecoin operators outside of New York any more or less regulated.
Specifically, Paxos, which sponsors PAX, and Gemini, which sponsors GUSD, were issued limited purpose trust company charters in New York to “operate a virtual currency exchange through which [they offer] customers buying, selling, sending, receiving, and storing virtual currency.” NYDFS is the financial regulator that regulates New York-charted trust companies. Therefore, these companies have their own trust charter and are regulated by the NYDFS.
In contrast, TrueCoin, LLC currently collaborates with independent third-party trust companies in the state of Nevada (currently Prime Trust and Alliance Trust) to hold escrowed funds. The DBI regulates Nevada-charted trust companies. Therefore, given that TrueUSD operates through Prime Trust and Alliance Trust, which are regulated by the DBI, TrueUSD is subject to regulatory scrutiny by the state trust regulator in Nevada in addition to FinCEN. Unlike the NYDFS, other state financial regulators like the DBI in Nevada have not made public statements about their regulation of trust companies and associated stablecoins.
Importantly, the amounts of TrueUSD held and custodied by Prime Trust and Alliance Trust are audited on a bi-monthly basis.
Concluding Thoughts
Ultimately, both state and federal regulators play an important role in the regulation of digital currency sponsors. We proactively engage in conversations with the regulators, such as the US Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), the Office of the Comptroller of Currency (OCC), the Board of Governors of the Federal Reserve System (the Fed), and various other financial regulators to ensure we meet all regulatory requirements for TrueUSD, stablecoins, and the future tokenization of other assets. We are pleased to see that regulators are embracing stablecoin products and encouraged by the various operating models companies have adopted to sponsor these products to satisfy the needs of their customers in a way that is fully legally compliant.
About the Author
Alex C. Levine is currently the Chief Regulatory Officer and Head of Legal for TrustToken. He has spent more than 15 years as an attorney and regulatory executive focused on the practice of cryptocurrency, securities, and derivatives law. Alex has previously held senior legal positions at the U.S. Commodity Futures Trading Commission (CFTC) and the U.S. Securities & Exchange Commission (SEC), where he was intimately involved in the regulatory response to the credit crisis and rule makings under the Dodd-Frank Act. He has served as Head of Legal and Chief Compliance Officer at LedgerX, the first federally-authorized derivatives exchange and clearinghouse for cryptocurrency. He was also Director of Regulatory Compliance at The Options Clearing Corporation (OCC), a systemically-important financial market utility (SIFMU). Prior to that, Alex was General Counsel & Chief Compliance Officer at the hedge fund Gladius Capital Management LP. He started his career as an Associate Attorney at the law firm of Kirkland & Ellis LLP. In addition to his legal and regulatory expertise, Alex has significant experience advising companies as well as providing strategic input on core business development and change management initiatives.
Alex received a J.D. from Stanford University Law School. He also attained an M.B.A. in Entrepreneurship and Analytic Finance from The University of Chicago Booth School of Business, where he specialized in the financial analysis of innovative investment products and complex trading strategies as well as in how startups create and sustain competitive advantages. Alex additionally graduated with a B.A. in Economics & Politics from Oberlin College.
