More in The New York State Department of Financial Services approval this week of two digital currencies is raising questions about whether regulators are changing the way they view crypto-related firms Certainly some saw it as a positive sign noting that both currencies the Gemini dollar and the Paxos Standard are pegged to the US dollar In theory every virtual token issued will match the value of a dollar at all times Theres a signal being given out that if youre prepared to launch something in the digital currency space that has more stability youre probably going to get it approved said Christine Duhaime managing partner at Duhaime Law The announcement was curious because the New York regulator has been notoriously tough on fintechs Cryptocurrency companies have called the process of getting a state BitLicense for instance a bottleneck and an absolute failure Maria Vullo the superintendent of the NYDFS positioned the move as a way of fostering innovation while ensuring responsible growth The New York State Department of Financial Services run by Maria Vullo has been seen as skeptical of digital currencies Its not clear these approvals indicates a change however Bloomberg News But many observers remain skeptical the approvals represent a new attitude by regulators including the NYDFS Still they say they are important for other reasons and are a sign of how the crypto space is evolving Thats in part because the new currencies are based around the idea of stability rather than the volatility of bitcoin the most famous cryptocurrency and others Gemini Trust the virtual exchange run by Cameron and Tyler Winklevoss and Paxos Trust which operates the virtual currency exchange itBit were both approved to offer a kind of price-stable cryptocurrency commonly known as stablecoin The original premise of bitcoin was to have not just a store of value like digital gold but to have a medium of exchange and a unit of account which suggests that goods would be priced in bitcoin and then youd use bitcoin to buy them said Lex Sokolin global director of fintech strategy at Autonomous Next Neither of these things have become true so bitcoin today is just a thing people buy to experience capital gains Thats a disappointment for a lot of people in the crypto universe so some of them have gotten attached to this idea of if you took volatility out of bitcoin then it would be used for buying goods and services The most well-known stablecoin is Tether which is said to have about 3 billion in deposits backing it But Tether has been criticized for not being able to prove it has the dollars to back up its tokens Geminis dollars will be backed by US dollars held at State Street Paxos Standard will be backed by US dollars held in several US FDIC-insured banks Both companies have hired third-party auditors to verify the dollar backing The first users of stablecoin will be people who buy and sell assets on blockchains already said Charles Cascarilla CEO and co-founder of Paxos Crypto asset traders and purchasers are in need of a payment mechanism that has the same uptime and dynamism as those assets he said If you trade bitcoin or Ethereum or some other crypto assets you can trade that 24 hours a day seven days a week but you cant move the payment that fast Your payment is tied to the banking system and it could take days Thats very cumbersome whereas now if you have a reliable payment mechanism moving just as fast that could be of benefit to institutions exchanges and consumers Over time stablecoin will be used not only for trading crypto assets but for consumer payments settling real estate transactions and to settle stock or bond trades Cascarilla said To use a stablecoin a consumer would download an Ethereum wallet buy stablecoin and send it to someone else who has an Ethereum wallet The money would not go through a central bank or any other intermediaries The payment would be pseudonymous everyone on the blockchain could see the transaction but they couldnt see the identity of the payee Cascarilla said stablecoin is a way to modernize cash Cash is highly relevant and trusted but its functionality has not been able to keep pace with the rate of innovation he said Were keeping core principles in place and pulling cash forward into a blockchain world in a way that creates reliability and functionality for everyone This could provide opportunities for unbanked people for whom the banking system is too expensive he said To win regulators over the two companies agreed to comply with New York bank regulators rules on anti-money-laundering anti-fraud consumer protection and cybersecurity The NYDFS declined a request for an interview The NYDFS was already very familiar with both companies It granted them limited-purpose trust company charters in 2015 Paxos in May Gemini in October and both have been under its jurisdiction ever since We spend a lot of time dialoguing with the regulator said Cascarilla Each time we build a new product we have it approved by the department Paxos onboarding verification and transaction monitoring procedures are just like any banks from an anti-money-laundering know-your-customer perspective he said Vulnerable to attack Theres a wrinkle in the notion of stablecoin stability Sokolin noted that currency traders could attack stablecoins and cause them to collapse They could generate massive volumes of sell orders borrow stablecoin and sell it on the market or write smart contracts that short the tokens artificially until Paxos and Gemini no longer have enough money in the vault to support the price This is what currency traders do they blow up attempts to keep things at a certain level Sokolin said If I break the currency and drive it down to 20 cents and then I buy up a whole bunch of it and the premise of the currency is that its going to go back to a dollar then I have 80 cents of capital appreciated in there Youre pretty incented to do this stuff Its not illegal or outlawed in any way Its just trading If the stability of stablecoin becomes so large that it cant be attacked by traders the US government will question why these companies are printing so much fake digital money when that should be the governments job he said In some ways its weird that all these little players are in the business of digitizing the US dollar while the central bank isnt interested Sokolin said According to Sokolin stablecoin makes the most sense as a way for cryptocurrency exchanges to deal with idle cash in accounts the way traditional brokerage accounts use money market funds or cash sweeps If I have 50 000 worth of funds in an exchange I sell all my bitcoin and buy another asset but for whatever reason theres 50 left sitting in cash a crypto exchange today is not set up from a regulatory perspective to have a market fund because its not an investment broker- dealer and its not a bank so it cant have a deposit account Sokolin said With the cash in stablecoin the exchange isnt forced to buy dollars The on- and off-ramp between fiat and crypto is terrible both because of the capital gains that are flagged and because the fiat money system is so clunky Sokolin said The role banks might play Banks are unlikely to want to use stablecoin from a private issuer Duhaime said The CEO of any big bank will say the most important thing I need to know is how theyre handling AML terrorist financing and sanctions compliance she said They dont go much further until they can answer those questions She predicted that banks will create their own stablecoin or partner with other institutions to issue a joint stablecoin That way they can limit its use to clients for which they have already gone through KYC AML procedures Its so much easier to do that than to take on unknown clients from an exchange she said You dont know what happened in the onboarding process so youre taking risks with that client base The new stablecoins are probably good for the financial services industry because theyre dollar pegged and asset backed said Huhnsik Chung a partner at Stroock Stroock Lavan in New York Are they going to gain traction I hope so But I think that remains to be seen he said At the end of the day its a collateralized token where you have to put aside a dollar for every dollar you offer up in their token Hopefully it will help improve acceptance of digital assets to financial institutions and investors Its a step in the right direction Editor at Large Penny Crosman welcomes feedback at pennycrosman sourcemediacom