NEW YORK – December 21, 2022 – On December 15, 2022, Paxos, the leading regulated blockchain and tokenization infrastructure platform, submitted recommendations to the Financial Stability Board (FSB) on how best to safely oversee a global, fiat-backed stablecoin and its issuer. Paxos welcomed the opportunity to provide comments to the Financial Stability Board and agreed with the agency’s guiding recommendation that digital assets and services providers should be subject to the principle of “same activity, same risk, same regulations” as the traditional financial system. Paxos believes many international financial authorities already have frameworks and regulations in place to support the growth and safe adoption of this critical technology.
Paxos is the issuer of the two largest prudentially regulated, trust-issued stablecoins – the Pax Dollar (USDP) and the white-label Binance Dollar (BUSD). Every Paxos stablecoin is fully backed by one US dollar held in cash and cash equivalents (in the form of short-term US Treasury Bills or US Treasury overcollateralized overnight reverse repurchase agreements). As a regulated trust company, our stablecoins are always segregated from customer funds and custodied in bankruptcy-remote accounts held in trust for our customers as required by our regulators. This structure provides legal consumer protections as opposed to “constructive trusts” of other stablecoin issuers. We strongly believe all stablecoin issuers should be subject to regular oversight, examination and approval requirements of a primary prudential regulator.
Paxos offered several distinguishing points of consideration to the FSB:
- Regulatory gaps are not as wide as many current players in the space claim.
Paxos believes current prudential regulatory authorities exist that offer a safe path for the issuance of stablecoins within a primary prudentially regulated state and federal trust structures. That means any market participant today could pursue a safe path forward to issue regulated stablecoins in the US. Simply put, most stablecoin operators today affirmatively choose to operate outside of regulation – these players forgo consumer protections for purposes of self-interest. Any gaps that do exist can be addressed with narrow changes to chartering requirements for, and enforcement actions against, those issuers that accept customer deposits or make loans.
- The failure to enforce existing regulatory authority is problematic.
When securities, consumer financial protection and other financial regulators fail to identify and take enforcement actions against issuers that ignore existing rules, regulators implicitly encourage those issuers to continue posing risks to the public. In this way, regulators also allow those firms to grow at the expense of safer and more regulatorily compliant stablecoins issuers that submit to regulatory approval and examination processes.
- Money transmitter licenses (MTLs) and money services business licenses (MSBs) are insufficient for the safe issuance of stablecoins.
Paxos believes stablecoins issued through these state-level licenses are inadequate, lack examination and consumer protections and fail to enforce critical risk management practices that ensure financial stability. Stablecoin issuers relying only on MTLs or MSB registrations expose their customers to destabilizing risk of losses. These stablecoin issuers are not qualified custodians and do not submit to the oversight and product approval processes required by primary prudential regulators, which can lead to insufficient risk management practices. If these stablecoin issuers become insolvent, customers would be unable to access funds unless and until courts determine whether customer assets belong to the senior creditors of the issuer’s bankruptcy estate. Further, those who issue under MTLs or MSBs have significant discretion as to the manner in which they can invest customer funds. For example, certain states allow customer balances to be held in the form of commercial paper, Yankee certificates of deposit, or corporate bonds. Such investments do not offer customers the same level of price stability as a prudentially regulated stablecoin with a conservative investment mandate.
- Market developments of the last several weeks only highlight the importance of customers’ legal claims on assets, access to redemption and prudential supervision.
Recent failures and bankruptcies of digital asset firms have demonstrated that even when assets are held in ‘for the benefit’ of customers or in constructive trust accounts (instead of legal custodial trusts), there is the possibility a bankruptcy court will determine that customer assets are the property of creditors of the corporate estate. This will only lead to consumer losses and huge distrust in the potential of blockchain technology.
- Stablecoins issuance should follow a strict framework in order to protect global consumers. These framework requirements should include:
- Stablecoins should only be issued if approved and regulated by a prudential regulator. Stablecoin issuers should be regulated financial institutions subject to supervision and examination of a primary prudential regulator.
- Stablecoin reserves should be required to be held in only cash equivalents of the stablecoin (meaning “dollar stablecoin” reserves are held only in dollars and dollar cash-equivalents).
- With the exception of engaging in US Treasury overcollateralized, overnight reverse repurchase agreements with extremely credit worthy counterparties, customer cash stablecoin reserves should not be loaned out by the issuer.
- Stablecoin reserves should be required to be held in legal custodial trust accounts that are bankruptcy-remote and fully segregated at all times.
- In the past months, we have witnessed at least two leading dollar-stablecoin issuers who used their stablecoins in lending activities and experienced hundreds of millions of dollars of losses related to those activities. When a stablecoin issuer, or an affiliate, makes loans regulators must ensure the lending activities are regulated and that a parent company has adequate capital to be a source of financial strength to both the issuer and the lender.
From the start, Paxos has built oversight, risk management and corporate controls into all aspects of our operations. Prudential regulation and oversight is the only path forward to mainstream consumer adoption of this critical technology. Pushing stablecoin activity offshore or into the shadows only increases risks to customers and to the public. Paxos will accelerate the mainstream adoption of blockchain and tokenized assets by being interoperable between digital asset ecosystems and traditional finance. Paxos addresses the blockchain and tokenization needs of global, regulated enterprises.
To learn more about Paxos’ commitment to transparency and regulation, visit our website.
Paxos is the leading regulated blockchain infrastructure platform. Its products are the foundation for a new, open financial system that can operate faster and more efficiently. Today, trillions of dollars are locked in inefficient, outdated financial plumbing that is inaccessible to millions of people. Paxos is replatforming the financial system to enable assets to instantaneously move anywhere in the world, at any time, in a trustworthy way.
Paxos uses technology to tokenize, custody, trade and settle assets. It builds enterprise blockchain solutions for institutions like PayPal, Interactive Brokers, Mastercard, MercadoLibre, Nubank, Bank of America, Credit Suisse and Societe Generale. Paxos is a top-funded fintech company with more than $540 million raised from leading investors including Oak HC/FT, Declaration Partners, Founders Fund, Mithril Capital and PayPal Ventures. With offices in New York, London and Singapore, Paxos takes a global approach to modernizing the financial system.