September 10, 2018 marked a watershed moment for the cryptocurrency industry as two new dollar-pegged stablecoins received official approval from the New York Department of Financial Services. Gemini Trust Company, the cryptocurrency exchange founded by Cameron and Tyler Winklevoss, and Paxos Trust Company, the firm behind the itBit exchange, both launched their respective stablecoins on the Ethereum blockchain, offering the first fully regulated alternatives to Tether.
TL;DR
- NYDFS approved Gemini Dollar (GUSD) and Paxos Standard (PAX) on September 10, 2018
- Both stablecoins are ERC-20 tokens pegged 1:1 to the U.S. dollar and run on the Ethereum blockchain
- Gemini Dollar backed by reserves held at State Street Bank with FDIC pass-through insurance
- Both coins subject to Bank Secrecy Act, anti-money laundering, and OFAC compliance controls
- Unlike Tether, both new stablecoins have undergone independent smart contract audits
A Regulatory Green Light
The approval from the NYDFS represented a significant milestone in the maturation of the cryptocurrency market. NYDFS Superintendent Maria Vullo emphasized that the approvals demonstrated that companies could create innovation and maintain strong compliance standards within a robust state regulatory framework that safeguards both regulated entities and consumers.
Both Gemini and Paxos received what amounts to a regulatory seal of approval that Tether, the dominant stablecoin since 2014, had never obtained. The NYDFS required stringent assurances from both companies, including full compliance with the Bank Secrecy Act, anti-money laundering protocols, and Office of Foreign Assets Control controls to prevent the tokens from being used in connection with money laundering or terrorist financing.
Gemini Dollar: Institutional Grade Backing
The Gemini Dollar, trading under the ticker GUSD, was designed from the ground up to address the trust concerns that had plagued Tether. According to the company, U.S. dollars backing the stablecoin are held at State Street Bank, one of the largest custodian banks in the world, and are insured through the Federal Deposit Insurance Corporation pass-through deposit insurance program, subject to applicable limitations.
To ensure ongoing transparency, Gemini enlisted BPM Accounting and Consulting to conduct monthly reviews of its bank holdings, providing regular third-party verification that each GUSD token is fully backed by real dollars. The smart contract controlling the Gemini Dollar was also independently audited by Trail of Bits, a respected cybersecurity firm specializing in blockchain security.
For users, the process was straightforward: traders with a Gemini account could convert U.S. dollars one-to-one into Gemini Dollars and withdraw them to any Ethereum address. Conversely, GUSD could be deposited back into a Gemini account and redeemed for fiat currency.
Paxos Standard: Instant Redemption for Traders
Paxos Standard, trading under the ticker PAX, took a slightly different approach. Customers could purchase and redeem tokens directly through Paxos.com, while investors using the itBit exchange or its over-the-counter desk could redeem their crypto holdings for Paxos Standard instantaneously. The itBit exchange also offered OTC trading of PAX tokens.
Like Gemini, Paxos committed to monthly third-party audits. The company engaged an independent public accounting firm to review and attest that all Paxos Standard tokens were fully backed by actual dollars. The PAX smart contract was audited by Nomic Labs, another blockchain security specialist, to verify that the code operated as intended.
Ethereum as the Foundation
Both stablecoins were built as ERC-20 tokens on the Ethereum blockchain, a deliberate choice that distinguished them from Tether, which runs on the Omni Layer protocol on top of the Bitcoin blockchain. The Ethereum foundation offered several advantages: faster transaction times, broader smart contract compatibility, and easier integration with the growing ecosystem of decentralized applications and exchanges.
When asked about plans to integrate the Gemini Dollar into other platforms such as wallets, point-of-sale systems, or other exchanges, Gemini was non-committal but optimistic. As an ERC-20 token on the open-source Ethereum network, GUSD can be sent to any Ethereum address, the company noted, expressing hope for third-party adoption.
The Stakes for Compliance
The NYDFS made clear that both companies face serious consequences for non-compliance. The approval terms stipulate that both Paxos and Gemini could have their charters revoked if they fail to comply with any of the agency provisions. This enforcement mechanism provided a level of accountability that had been missing from the largely unregulated stablecoin market.
The launch came at a critical time for the cryptocurrency industry. With the total market capitalization having shrunk by approximately $640 billion from its January 2018 peak, and Bitcoin trading around $6,300, the stablecoin approvals offered a rare piece of positive regulatory news in what had been a punishing bear market.
Why This Matters
The simultaneous approval of GUSD and PAX represented more than just the launch of two new cryptocurrencies. It signaled that regulators were willing to engage constructively with the crypto industry, provided that companies met rigorous compliance standards. For a market desperate for institutional legitimacy, the NYDFS approvals were a crucial step forward.
The contrast with Tether was unmistakable. While the dominant stablecoin had long faced questions about its backing and transparency, Gemini and Paxos entered the market with regulatory blessing, audited reserves, and transparent smart contracts. Whether this would be enough to dethrone Tether remained to be seen, but the gauntlet had been thrown down.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Cryptocurrency investments carry significant risk. Always conduct your own research before making investment decisions.