Only two regulated stablecoins with 96% cash reserves may survive the ‘War on Crypto’

Jul 23, 2021 0 comments


Circle and Tether claim that they are regulated stablecoins, which invited Paxos’ criticism. Unregulated stablecoin issuers are likely to use consumer funds to pursue risky high-yield investments for their financial gain, posing a threat to stablecoin users.

Paxos Standard and Binance USD backed by 96% cash-equivalents unlike competitors

In a blog post published on July 21, Paxos stated that the duo of stablecoins Paxos Standard (PAX) and Binance USD (BUSD) issued by the Paxos Trust company, a New York-based financial institution and technology company are backed by nearly 100% cash or equivalents. The firm has called out Circle and Tether on their claims of being ‘regulated stablecoins.’

Paxos has waged a stablecoin war through direct comparison of the dollar reserves of all three stablecoin issuers, Tether Limited that issues USD Tether (USDT), and Centre (founded by Circle) that issues USD Coin(USDC). Both companies are yet to comment.

In the competitive stablecoin ecosystem, the liquid reserves of cash and cash equivalents for USDC stand at 61% and USDT at 75.85%. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and can be liquidated within three months or less. According to Paxos, low cash reserves and the equivalents of its competitors are a critical weakness.

Customers using USDC and USDT face undue risk considering the tokens’ illiquidity (investment maturities are as long as several years), credit risk from corporate default, and interest rate risk that can impair the value of longer-maturity securities.

Paxos Trust Company’s PAX and BUSD are free from these risks since the firm is regulated by the New York State Department of Financial Services (NYDFS).

The NYDFS requires the firm to have its products and services approved and supervised on an ongoing basis. According to Paxos, the only other regulated stablecoin issuer is Gemini Trust Company, which issues the Gemini dollar (GUSD). NYDFS regulates GUSD, PAX, and BUSD.

Colin Wu, Chinese journalist, compared PAX and its competitor in his recent tweet.

USDC and USDT are therefore akin to unregulated digital assets like Bitcoin, Ethereum, and others. In Paxos’ latest blog post, Dan Burstein, General Counsel, and Chief compliance officer states,

The principal value of regulatory oversight is to ensure that the reserves consist of real, liquid, accessible dollars — if neither USDC nor Tether can fulfill these promises, can they even be considered dollar-backed stablecoins?
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