Recent events in the digital asset marketplace have impacted the industry in ways that were difficult to fathom only months ago. As more facts come into focus, it’s an opportune time to reflect on the road ahead.
Paxos continues to lead by example
Paxos had a tremendous year despite market turmoil, generating positive cash flow and achieving record revenue and profits. We continue to measure our success by our ability to act with integrity, protect customer assets and innovate within established regulatory frameworks.
Recent highlights underscore the momentum carrying us into 2023. We partnered with Mastercard, bringing their customers secure access to digital assets. We strengthened our regulatory stack by securing a formal license for our Singapore entity from the Monetary Authority of Singapore (MAS), making Paxos the world’s most comprehensively regulated digital asset and blockchain platform.
Paxos also successfully navigated market fallout following the collapse of FTX. Today, we remain vigilant in ensuring robust liquidity on our exchange amidst market volatility. We continue to monitor and mitigate partner and counterparty exposure from the broader contagion following FTX. Our business is stronger than ever because of our vigilant risk mitigation and consistent, regulatory-first approach.
Next year public sentiment will push for further transparency and regulation. The time is right and the need is apparent.
Building trust through transparency
One of blockchain technology’s fundamental benefits is that it facilitates an open and transparent financial system. It is inherently decentralized, immutable, transparent and secure – hence its “trustless” reputation.
However, establishing trust is necessary for the broader system of people who build and maintain the technology – and the service providers users rely upon. A lack of transparency impacts overall trust in blockchain networks because they are also networks of people –and bad behavior anywhere on the network affects overall trust. Paradoxically, the network needs trustworthy service providers to gain utility from blockchain’s trustless nature at scale.
Prudent regulation establishes clear, uniform standards to enable transparency. To service providers, regulation and compliance should be seen as tools to build trust along with transparency, governance, capital and implementation of management best practices.
Paxos continues to build trust through all measures, beginning with regulation. As others start to follow our lead, we will see how uniform transparency brought about by sensible regulation is a powerful business enabler.
Make regulation the standard in 2023
A balanced approach to regulation would mean guardrails are in place to protect customers and their assets. Clear oversight is crucial in securing consumer confidence and enabling networks to attract more participants. Prudent regulation also helps the industry avoid bad actor setbacks while allowing productive enterprises to flourish. Clarity, consistency and certainty in regulatory guidance are crucial for innovators to continue building and for the US to remain a global leader in finance and technology.
We are not starting at “zero,” as some may want you to believe. For example, regulatory mechanisms are already in place that can effectively guide stablecoin issuance. Current regulatory authorities offer a safe path for issuing stablecoins within a primary, prudentially regulated state and federal trust structure. That means any market participant today could pursue a safe way forward to issue regulated stablecoins in the US. It was also why, in 2015, Paxos pursued (and was the first to achieve) a limited-purpose trust charter for digital assets from the New York Department of Financial Services (NYDFS).
As a trust company, our regulators require that our stablecoin reserves are always held in fully segregated bankruptcy-remote accounts for our customers. This structure provides legal consumer protections as opposed to “constructive trusts” of other stablecoin issuers. For example, in the event of Paxos Trusts’ insolvency, New York banking law gives legal certainty that customer assets are immediately returnable and not used to satisfy the debt of Paxos.
Prudential regulatory oversight offers far greater customer legal protections than state-administered money transmitter license (MTL) or money services business (MSB) registrations. Stablecoin issuers relying solely on MTL and MSB registrations expose their customers to destabilizing risk. These issuers are not qualified custodians, do not submit to comprehensive oversight or product approval processes and do not uphold institutional-grade risk management standards.
As an industry, we must do more. All stablecoin issuers, centralized cryptocurrency exchanges and custodians should be subject to regular oversight, examination and the approval requirements of a primary prudential regulator. Building a more open and secure financial system is about more than simply trusting the code. Opaque risks and bad actors can cause lasting damage.
There will be challenges ahead, but I see an opportunity for responsible participants and regulators to collaborate, bringing more oversight and greater transparency to the industry. Now is the time for this collaboration and we hope others will join.