Paxos Becomes First Stablecoin Issuer to Disclose Full Monthly Reserve Holdings Backing

Paxos will now disclose on a monthly basis the specific financial instruments backing its USDP and BUSD stablecoins, in addition to its attestations. These reports will provide the CUSIP numbers of all instruments backing USDP and BUSD, showing that Paxos only backs its stablecoins with cash, overnight loans secured only by US Treasuries, and US Treasuries with a less than 90 day maturity. As a Trust Company chartered by the New York State Department of Financial Services, Paxos is legally required to hold all regulated stablecoin reserves in bankruptcy remote, fully-segregated accounts and in only cash and cash equivalents. [Read more]

The Financial Bubble Era Comes Full Circle

Matt Taibbi asks some tough questions about the sanctity of the reserve assets that back Circles USDC stablecoin, and the issue of bankruptcy remoteness. Circle is unlike some competitors, whose user agreements specifically spell out that reserves are, say, “fully backed by US dollars held by Paxos Trust Company, LLC,” or “custodied pursuant to the Custody Agreement entered into by and between you and Gemini Trust Company, LLC.” Those describe trust agreements, which are truly bankruptcy remote. However, Circle is not a trust, so customers  are guarded only by protections afforded under state money transmission laws. However, Circle is only regulated  as a money transmitter in the states where Circle has licenses, and the firm has obtained licenses only in those states were licenses are required. There are other reasons to be concerned as a USDC hodler, and I recommend reading the whole post. [Read more]

See also this Twitter thread which wonders aloud whether customer funds held by other US “money transmitters” like PayPal, Square and Venmo are truly bankruptcy remote!? [Read more]

Why Stablecoins Fail: An Economist’s Post-Mortem on Terra

This article from the Richmond Fed dives into potential answers to these questions about the failed Terra UST stablecoin. UST was backed by LUNA, but the price of LUNA was backed by its option value of converting to UST. When the confidence of this circular backing is shaken, the liquidity of algorithmic stablecoin becomes flighty. In this case, the algorithm does not fully function because Terra needs to (but can’t always) defend both UST and LUNA. When market liquidity evaporated, UST and LUNA ultimately relied on the issuer’s equity to support the prices, similar to the backing of a more traditional currency as seen in the Asian Financial Crisis. It is the part of economics cannot be replaced by technology. [Read more]

Crypto collapse: 3AC, Voyager, Celsius, and other DeFi casualties: Another great summary of the growing DeFi Dead Pool by Amy Castor and David Gerard. [Read on…]

Upcoming events I’m affiliated with:

The CBDC Think Tank, in partnership with the International Monetary Fund and George Washington University, is hosting a full-day in-person CBDC Masterclass on October 12 in Washington DC. The sessions are designed as instructional deep dives with full presentations and Q&A components.  [Register here]