Following the collapse of FTX, many are seizing the moment to push for increased regulatory oversight of digital assets. As voices get louder, the outcome will likely include inroads toward federal legislation for digital assets.

Public still looking for answers 

Industry experts, consumer protection advocates and political leaders who want to prevent another FTX-like situation want to gain insight into the events that took place and the questions being asked now, especially by lawmakers, may hint at future regulatory standards. House Financial Services Committee Chair Maxine Waters, along with Ranking Member Patrick McHenry, recently announced a bipartisan inquiry into the events surrounding FTX’s bankruptcy. The Chair for the United States Senate Finance Committee, Ron Wyden, recently requested information from six cryptocurrency exchanges by December 12, 2022. Senator Wyden’s questions get at key concepts of safety and soundness of digital assets and consumer protection. The exchanges’ responses could influence digital asset regulation in the near future.

What does the public want to know?

Senator Wyden’s questions – noted below – primarily speak to transparency and asset management best practices. Well-regulated blockchain companies, like Paxos, have thought through these issues and have systems and processes in place to protect our customers. We have oversight, risk management and corporate controls built into all aspects of our operations and independent third parties which audit and attest to them regularly. We also have an independent board of directors.

• How does the exchange segregate assets bought or sold on its platform from its subsidiaries or affiliates?

Separating corporate and client assets is central to successful regulation of digital assets. Many US-based companies operating with only MTLs are not required to – and do not – segregate assets. This can expose the customer whose assets have been commingled with corporate assets to risk in turbulent markets. 

At Paxos, we do not and will never commingle customer funds with Paxos corporate funds. This is both the right practice and legally required by our regulators.

• Does the exchange use customer funds for any purpose that is not disclosed to the customer?

Using customer funds opens the customer to risks they may not be aware of or want to avoid. 

At Paxos, we never use customer funds for any purpose, and they are held bankruptcy remote in cash and US Treasuries. 

• Does the exchange, its directors, officers or employees, or any subsidiaries or affiliates use customer data to inform institutional or personal trading, including futures or options trading?

Profiting by trading against customers – as FTX did through its affiliate Alameda – creates a tremendous conflict of interest. 

Paxos never profits from trading against our end users.

• What is the exchange’s ratio of debt-to-assets and debt-to-equity (including capital)? Do you consider the exchange to be highly leveraged?

Opaque leverage is one of the factors that led to FTX’s failure. Excess leverage can ultimately hurt the end customer, especially if assets are not properly segregated. 

We’ve designed Paxos and its operations to be “institutional grade” so that we protect customers and their assets. We avoid the risky business practices of lending off-platform, borrowing against customer funds or speculating. 

 

For the moment, Senator Wyden’s request for information mostly focuses on consumer protections and safety and soundness as Congress considers its next move – weighing new bills and oversight hearings as possible next steps. As the most comprehensively regulated digital asset and blockchain infrastructure provider globally, Paxos looks forward to increased regulatory oversight of digital assets.

Would you like to talk to someone on our team to learn more about digital asset regulation? Contact us.