Paxos being targeted, the issuance of BUSD suspended, will there be liquidity issues?

The issuer of the stablecoin BUSD, Paxos, was banned from issuing by the New York Department of Financial Services (NYDFS) yesterday. NYDFS stated that this was due to Paxos not being able to manage the token with a "secure" attitude. Binance founder CZ also stated that the market value of BUSD will gradually decrease and may no longer be used as a primary trading pair. Are the reserves of BUSD sufficient? Will they be enough to handle a large-scale run on the token by customers? Let's first take a look at the latest reserve information from Paxos.

Introduction to Paxos

Paxos holds a New York Department of Financial Services (NYDFS) trust charter and provides custody services for assets such as cash, gold, and cryptocurrencies. It is also the issuer of the stablecoin BUSD. The Office of the Comptroller of the Currency (OCC) conditionally approved Paxos' application for a national trust bank charter in April 2021. However, Paxos still needs to demonstrate to the OCC that its business model can operate safely. There were rumors in the market that Paxos was asked to withdraw its application for a national trust bank charter from the OCC.

Note: A national trust bank is a limited-purpose national bank that is allowed to engage in trust activities and is directly regulated by the U.S. federal government, bypassing state laws.

Latest Reserve Information

According to the latest reserve information released by Paxos, as of 2/10, there is a total of $16.1 billion BUSD in circulation. Of this amount, $3 billion consists of short-term U.S. Treasury securities that mature before the end of February.

The remaining $12.2 billion is operated through reverse repurchase agreements, where Paxos uses long-term U.S. Treasury bonds as collateral and operates on an overnight basis, ensuring high liquidity.

In terms of deposit protection, Paxos explained in the report that as of 2/10, it holds $830 million in statutory currency, or cash deposits, with depository institutions. Paxos also holds $14.5 million in cash deposits in the deposit placement network operated by IntraFi Network LLC and/or Reich & Tang Deposit Solutions, LLC, all of which are FDIC-insured. Paxos' depository institutions include BMO Harris Bank N.A., Signature Bank, Silvergate Bank, State Street Bank and Trust Company, and Customers Bank. Additionally, Paxos has obtained additional protection through insurance worth $670 million. However, Paxos acknowledges that it may still incur losses if the banks default.

Is BUSD Facing Severe Redemption Pressure?

According to data on CoinMarketCap, following the recent news about BUSD, the circulating supply decreased from $16.15 billion to $15.8 billion, a reduction of $350 million, accounting for approximately 2% of the total circulating supply. As BUSD will no longer be issued, the decrease in circulation represents permanent redemptions. However, the current redemption situation is still within manageable limits.

Although Paxos has emphasized its status as a NYDFS-chartered trust company, which must meet capital reserve, consumer protection, and anti-money laundering requirements set by the NYDFS, it appears to be safer than Tether, which is not registered with the New York State Department of Financial Services, and Circle, which only holds a BitLicense. However, being simultaneously targeted by regulatory authorities SEC and NYDFS raises questions about whether the risk assessment and due diligence were properly conducted. Will other stablecoin issuers face similar situations? Let's continue to observe the developments.