Paxos Legal Advisor Fires Shots! Reveals 96% Reserve, Claims USDT, USDC Completely Unregulatable

The issuer of the US dollar stablecoin, Paxos, disclosed its cash reserves, with up to 96% backed by cash or cash equivalents, a much higher percentage compared to the mainstream stablecoins USDT and USDC in the market. Paxos' legal counsel also criticized these two stablecoins for not being bound by regulation.

Perhaps influenced by the recent stablecoin regulatory meeting called by former US Treasury Secretary Yellen, the latest regulatory trends seem to be more focused on stablecoins.

SEC Chairman Gary Gensler hinted in an interview with the American Bar Association that some security-backed stock tokens and stablecoins may be considered securities and subject to securities laws.

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This has prompted the issuers of the two major US dollar stablecoins, USDT and USDC, to come forward in recent days to disclose their asset reserve status. However, Paxos rebuked them, criticizing that both are essentially unregulated, with their reserve systems not subject to any constraints.

Paxos Reserves Up to 96%

On 7/21, Dan Burstein, legal advisor of Paxos Standard, the issuer of the USD stablecoin PAX, announced the cash reserves of Paxos Standard and compared them with the reserves of USDT and USDC.

Dan Burstein criticized that USDT and USDC actually expose user assets to risks. Besides the name, they are not stable at all. Their reserves are supported by low liquidity and high-risk debts. He questioned:

The value of regulation lies in ensuring that reserves are composed of real, liquid, and accessible dollars. If USDC and Tether cannot fulfill these promises, can they really be considered stablecoins backed by the U.S. dollar?

Unregulated Stablecoins

Dan Burstein pointed out that USDC and Tether are not regulated digital assets. According to applicable regulations, they have no regulatory oversight, their reserves are essentially unrestricted, and they will not go bankrupt. This means:

• The majority of their reserves are supported by CDO corporate loans and bonds
• They cannot promise or guarantee that users can redeem dollars
• There is a risk of default in CDOs
• There is liquidity risk: CDOs often last for several years
• Issuers can frequently use reserves to pursue high-risk investments

Dan Burstein also found it strange that Circle listed reserves on its balance sheet, which means that Circle "considers the USDC reserves as their own assets?"

Only Three Compliant Stablecoins

In addition to criticism, Dan Burstein naturally highlighted the transparency of Paxos over other stablecoins. He claimed that there are only three regulated USD stablecoins globally:

1. Paxos Standard PAX
2. Binance Dollar (BUSD)
3. Gemini Dollar (GUSD)

1 and 2 are issued by Paxos Trust Company, and GUSD is issued by Gemini Trust Company. Both Paxos and Gemini are trust companies approved by the New York State Department of Financial Services (NYDFS). This means:

• Each stablecoin is pegged to the U.S. dollar
• Reserves are completely segregated from company assets
• The dollars in reserves are equal to or exceed the circulating supply of stablecoins
• Reserves can only be held in the safest forms, such as FDIC-insured deposits and short-term U.S. Treasury securities

Indeed, Tether is not registered with the NYDFS, and although Circle holds the "Bitlicense" granted by the authorities, Paxos emphasizes that they are a NYDFS-chartered trust company, which must meet NYDFS requirements for capital reserves, consumer protection mechanisms, and anti-money laundering, making them safer than companies holding only a Bitlicense.

According to The Block's data, USDT and USDC are the most widely circulated stablecoins, followed by BUSD, while PAX and GUSD are even lower than TUSD and Dai.