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After USDC disclosed its reserves backing this week, Paxos has released the composition of the reserves of its stablecoins, PAX and BUSD. Paxos, PayPal’s broker-dealer, is the custodian for both PAX and Binance’s stablecoin BUSD. As of June 30, 96% of their reserves have been cash and cash equivalents, with the remaining 4% in US Treasury bills maturing in October. Here, cash includes cash balances held in USD at insured depository institutions and Cash equivalents are short-term, highly liquid investments with maturities of 3 months or less. In its disclosure, Paxos Chief Compliance Officer Dan Burstein shared his displeasure and exasperation with the leading stablecoins USDT and USDC claiming to be regulated.
“Neither USDC nor Tether is a regulated digital asset, for the simple reason that neither token has a regulator. In fact, neither USDC nor Tether tokens are 'stablecoins' in anything other than name. These tokens are backed by illiquid and risky debt obligations – a critical weakness that no prudential regulator would allow to exist as this creates undue risk for their customers.”
USDT is the leading stablecoin with a market cap of $62.4 billion, capturing 58% of the market share, while USDC has a 24.3% market share with nearly a $27 billion market cap. PAX has a market cap of $907 million, while BUSD accounts for a 10.8% market share with an $11.37 billion supply. According to Burstein, only Paxos Standard (“PAX”), Binance Dollar (“BUSD”), and Gemini Dollar (“GUSD”) are regulated dollar-backed stablecoins by the New York State Department of Financial Services (“NYDFS”). He further argued that USDC and Tether’s reserves are backed substantially by corporate debt obligations, which means customers are not protected due to illiquidity risk, credit risk, and interest rate risk. In the case of USDC, he said, reserves are held on its issuer Circle's balance sheet meaning, they can use consumer funds to pursue risky high-yield investments for its financial gain.
“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?”