Shot's fired from Paxos: both USDC‘s and Tether’s tokens are “stablecoins” in anything other than name- both of their products are backed by illiquid and risky debt obligations — a critical weakness that no prudential regulator would allow to exist as thi

Stablecoins seem to be the talk of the town, nice post from last year... TerraUSD shizzle applicable...

A Regulated Stablecoin Means Having a Regulator

I have been reading with a combination of disbelief and exasperation the recent claims by Circle that “USDC has become the world’s most trusted and well-regulated dollar digital currency,” as well as claims by Tether that “Tether is registered and regulated.” Neither USDC nor Tether is a regulated digital asset, for the simple reason that neither token has a regulator.

USDC and Tether are used frequently in the crypto economy and have a useful role to play, just as Bitcoin, Ethereum and other unregulated digital assets play an important role. Users who are willing to tolerate the risk of a token backed by only 61% cash or cash equivalents (in the case of USDC) or 5% (in the case of Tether) should be free to take that risk — subject of course to applicable securities laws. But these tokens are not regulated, and they should never be confused with a regulated token.

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?

REGULATED STABLECOINS

As of today, there are exactly three regulated dollar-backed stablecoins in the world: Paxos Standard (“PAX”) and Binance Dollar (“BUSD”), both issued by Paxos Trust Company, and the Gemini Dollar (“GUSD”), issued by Gemini Trust Company. Paxos and Gemini are both Trust companies regulated by the New York State Department of Financial Services (“NYDFS”). Trusts are required to have their products and services approved and supervised by NYDFS. PAX, BUSD and GUSD are expressly approved by the NYDFS and supervised by the regulator on an ongoing basis. This means:

• The value of each stablecoin token is tied directly to the value of the US dollar, and the amount of “reserve” dollars equal or exceed the number of stablecoins outstanding.
• Regulators are overseeing the establishment and maintenance of reserves backing the stablecoins.
• Reserves may only be held in the safest forms, such as FDIC-insured bank accounts and in short-term maturity US Treasury instruments.
• Reserves are fully segregated from corporate assets, specifically for the benefit of token holders, and are held bankruptcy remote pursuant to the New York Banking Law.

Regulatory oversight is important because it assures stablecoin users that the dollars underlying their stablecoins are secure and will be immediately available when they want them. The NYDFS ensures the Trust companies and their individual tokens are following its strict rules at all times. Additionally, NYDFS regulatory oversight meets the ten high-level recommendations for stablecoins set forth by the Financial Stability Board in an important report issued last year for the G20.

UNREGULATED “STABLECOINS”

“Stablecoins” not subject to prudential regulation do not have the same oversight and guardrails. USDC and Tether reserves are not comprehensively overseen by any financial regulators. Their reserves are broadly unrestricted and not held bankruptcy-remote under applicable law. This means:

• The USDC and Tether reserves are backed substantially by corporate debt obligations.
• The consumer is not protected or guaranteed to get their dollars back when they redeem the token.
• There is illiquidity risk because these investments have maturities as long as several years.
• There is credit risk from a corporate default.
• There is interest rate risk that can impair the value of longer maturity securities.
• In the case of USDC, reserves are held on Circle’s balance sheet, implying that Circle views USDC reserves as its own property.
• The issuer can (and often does) use consumer funds to pursue risky high-yield investments for its own financial gain.

Source: https://www.paxos.com/a-regulated-stablecoin-means-having-a-regulator/