Paxos, which issues the USDP and the BUSD, has chosen to publish every month the details of the liquidity reserves of the two stablecoins. This is a strong step in terms of transparency, which reinforces the monthly audit reports already published.
Paxos chooses to be transparent about its reserves
The stablecoin issuer Paxos will from now on disclose the content of its reserves every month. This measure will be applied to its USDP as well as Binance’s stablecoin, the BUSD. This is a strong choice, in an environment where stablecoins are sometimes questioned on the back of uncertainty.
Like Circle and its USDC, the company was already publishing audit reports of its reserves on a monthly basis. These reports, certified by the firm Withum, attest to the amount held in reserve to collateralize the stablecoins issued. But this new release goes one step further by revealing the details of the assets used to constitute this collateral.
Charles Cascarilla, CEO and co-founder of Paxos, expresses his belief in this decision:
“The only way to build trust in stablecoins and grow the adoption of this important technology globally is to continue to embrace robust oversight and provide unprecedented transparency. Our stablecoins are a dollar backed by cash and equivalents and these enhanced disclosures underscore that point.”
USDP and BUSD backed by bonds
The company explains that Paxos Trust, which is the entity issuing the BUSD and USDP is regulated by the New York State Department of Financial Services (NYDFS). As such, these stablecoins can only be backed by “cash and cash equivalents.” In other words, fiat currency or bonds.
Thus, for each of the two stablecoins, Paxos will use bonds in two ways in its reserves. One part of these reserves is made up of US Treasury bills with short maturities, i.e., less than 90 days. The second part of the reserves is a bit more complex.
It is what is called a repo in the financial world. Paxos issues loans to other regulated institutions for one day. In return, it asks for collateral in U.S. Treasury bills. This collateral is worth more than the amount lent by Paxos. This collateral system works in such a way that even if the entity owing the money were to default on its debt, Paxos would retain the bonds so that it could resell them for its own benefit.
The company’s new monthly reports provide details of these holdings. For example, the BUSD’s reserve was set up as follows as of June 30:
- About $10.5 billion in short-term bonds;
- Approximately $6 billion in bonds for repo operations;
- Just over $738 million in cash.
The reports provide a detailed look at each position that makes up these lines.
While FUD can easily appear at this time, as we have seen with the USDC, collateralized stablecoins have a lot to gain from such transparency policies. Indeed, unlike blockchain transactions where everything is public and verifiable, here we can only rely on a company’s declaration. However, the fact that Paxos is regulated lends weight to the figures put forward.