Paxos Responds to FSB’s Recommendations of the Regulation of “Global Stablecoin” Arrangements

Recently, Paxos, the regulated blockchain and tokenization infrastructure platform, submitted recommendations to the Financial Stability Board (FSB) on how best “to safely oversee a global, fiat-backed stablecoin and its issuer.”

Paxos welcomed the opportunity “to provide comments to the Financial Stability Board and agreed with the agency’s guiding recommendation that digital assets and services providers should be subject to the principle of ‘same activity, same risk, same regulations’ as the traditional financial system.”

Paxos believes many international financial authorities already “have frameworks and regulations in place to support the growth and safe adoption of this critical technology.”

Paxos is “the issuer of the two largest prudentially regulated, trust-issued stablecoins – the Pax Dollar (USDP) and the white-label Binance Dollar (BUSD).”

Every Paxos stablecoin is “fully backed by one US dollar held in cash and cash equivalents (in the form of short-term US Treasury Bills or US Treasury overcollateralized overnight reverse repurchase agreements).”

As a regulated trust company, their stablecoins are “always segregated from customer funds and custodied in bankruptcy-remote accounts held in trust for our customers as required by our regulators.”

This structure provides legal consumer protections as opposed to “constructive trusts” of other stablecoin issuers. They strongly believe all stablecoin issuers “should be subject to regular oversight, examination and approval requirements of a primary prudential regulator.”

Paxos offered several distinguishing points of consideration to the FSB:

Regulatory gaps are not as wide as many current players in the space claim.

Paxos believes current prudential regulatory authorities exist “that offer a safe path for the issuance of stablecoins within a primary prudentially regulated state and federal trust structures.”

That means any market participant today “could pursue a safe path forward to issue regulated stablecoins in the US.”

Simply put, most stablecoin operators today affirmatively “choose to operate outside of regulation – these players forgo consumer protections for purposes of self-interest.”

Any gaps that do exist “can be addressed with narrow changes to chartering requirements for, and enforcement actions against, those issuers that accept customer deposits or make loans.”

The failure to enforce existing regulatory authority is problematic.

When securities, consumer financial protection and other financial regulators “fail to identify and take enforcement actions against issuers that ignore existing rules, regulators implicitly encourage those issuers to continue posing risks to the public.”

In this way, regulators also “allow those firms to grow at the expense of safer and more regulatorily compliant stablecoins issuers that submit to regulatory approval and examination processes.”

Money transmitter licenses (MTLs) and money services business licenses (MSBs) are insufficient for the safe issuance of stablecoins.

Paxos believes stablecoins “issued through these state-level licenses are inadequate, lack examination and consumer protections and fail to enforce critical risk management practices that ensure financial stability.”

Stablecoin issuers “relying only on MTLs or MSB registrations expose their customers to destabilizing risk of losses.” These stablecoin issuers are “not qualified custodians and do not submit to the oversight and product approval processes required by primary prudential regulators, which can lead to insufficient risk management practices.”

If these stablecoin issuers “become insolvent, customers would be unable to access funds unless and until courts determine whether customer assets belong to the senior creditors of the issuer’s bankruptcy estate.”

Further, those who issue under MTLs or MSBs “have significant discretion as to the manner in which they can invest customer funds.” For example, certain states “allow customer balances to be held in the form of commercial paper, Yankee certificates of deposit, or corporate bonds. Such investments do not offer customers the same level of price stability as a prudentially regulated stablecoin with a conservative investment mandate.”

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