The most important features of any financial product are its clarity, certainty and transparency. These features define both its utility and its safety. In the case of stablecoins, users should know what they own and outside observers should have a window into the activities of any firm holding reserves. Paxos follows the NYDFS guidelines for portfolio management1 at all times.
Today we are taking another step, through enhanced disclosures, to continue providing an unprecedented level of transparency in the stablecoin space. Every month we will disclose the specific assets down to the CUSIP2 that back our stablecoin reserves.
What’s in the Box?
The stablecoin reserve portfolio that Paxos holds is comprised of three financial assets that are entirely cash and cash equivalents under US GAAP3:
US Treasury Bills (T-Bills): BUSD (Market Value: $10.6B; Notional Position: $10.6B) and USDP (Market Value: $0.3B; Notional Position: $0.3B)
Paxos holds US Treasury Bills with maturities of 3 months or less. T-Bills are backed by the full faith and credit of the United States government and have no credit risk, barring an unprecedented default by the US Government. Further, the extremely short maturity means that T-Bills are largely price insensitive to immediate liquidation and moves in interest rates.
These form the cornerstone of the Paxos’ stablecoin portfolio and they are the simplest and safest form of cash equivalent instrument in US financial markets.
Overnight Reverse Repo Backed by US Treasuries: BUSD (Market Value: $6.3B; Notional Position: $6.2B) and USDP (Market Value: $0.3B; Notional Position: $0.3B)
Overnight Reverse Repo is the type of term only financiers could come up with–a jargonistic and overly-complicated label for a very simple concept. An overnight reverse repo is an overnight loan. Repo is one of the backbones of the US financial system and an extremely commonly used instrument. Short-term repo is deemed a cash equivalent under regulatory requirements and US GAAP.
On a daily basis, Paxos makes a loan to another regulated institution for one day. What makes this a repo, is that it’s collateralized by US Treasury Securities held in Paxos custody. While this is a high level of security, Paxos also requires our counterparties to post excess collateral. That means even if a borrower is unable to repay, Paxos is holding US Treasury securities in amounts that exceed the loan amount which can be liquidated for cash. This collateral will be fully disclosed on a monthly basis.
Bank Deposits: BUSD (FDIC Placement: $0.03B; Private Insurance: $0.5B; Other: $0.2B) and USDP (FDIC Placement: $0.2B; Private Insurance: $0.03B; Other: $0.02B)
Paxos holds cash in multiple insured depository institutions for liquidity needs (mint/burn stablecoins or to settle securities) outside of general banking hours and employs a variety of solutions to protect that cash.
Paxos employs a “deposit placement network” so that cash in that program is deposited across many US insured depository institutions to ensure that balances held at a single bank never exceed FDIC insurance limits4.
Paxos’ bank partners will also hold some dollars, in excess of the FDIC account limits, to meet non-banking hour redemptions. Only in the event of a failure of one of our partner banks could a portion of these reserves be at risk. Even then, FDIC coverage and pass-through coverage may apply for individual customers. Further, Paxos purchases private market insurance, from highly rated insurance and reinsurance companies, to provide further protection in the unlikely event of a bank default.
Paxos is committed to providing an unprecedented level of clarity, certainty and transparency in our efforts to earn the trust of our customers, regulators and the larger financial community.
1https://www.dfs.ny.gov/industry_guidance/industry_letters/il20220608_issuance_stablecoins
2https://www.dfs.ny.gov/industry_guidance/industry_letters/il20220608_issuance_stablecoins
3https://www.newyorkfed.org/data-and-statistics/data-visualization/tri-party-repo#interactive/volume/collateral_value
4A list identifying IntraFi Network insured depository institutions at which funds may be placed can be found at https://www.intrafi.com/network-banks.
A list identifying Reich & Tang Deposit Solutions insured depository institutions at which funds may be placed can be found at https://www.reichandtang.com/about/bank-lists/.
FDIC-insured deposits may also be held at BMO Harris Bank N.A. (FDIC Certificate #16571) Signature Bank (FDIC Certificate #57053), Silvergate Bank (FDIC Certificate #27330), and State Street Bank and Trust Company (FDIC Certificate #14).
Further, Paxos has obtained private uninsured deposit insurance. Not all deposits are covered by the FDIC or private insurance, and Paxos may still incur losses in the event of a bank insolvency.
Paxos may exclude particular insured depository institutions within each network from eligibility to receive funds.