At Paxos, we believe in the power of crypto and blockchain to transform the way value and assets move around the world. We also understand that operating within the world of finance means that in order to enable that transformation, we must adhere to regulation. We’ve seen a lot of companies (from Mt. Gox to HempCoin to all the vanishing ICOs) try and fail in this space, in part, because they don’t follow financial regulation.
So we have sought high levels of regulation from the beginning, as the first financial institution globally to be approved to operate in crypto, and always expect to operate this way, for the sake of protecting our customers’ funds and for building the business and industry for the long-term. We think this allows us to build a more credible and safer stablecoin than anyone else and is a huge differentiating factor from all other stablecoins which are not regulated (aside from Gemini) and therefore have uncertain futures.
Sometimes that means we have to deny customers from working with us. For example, we don’t accept customer from certain sanctioned countries, or who falsify information they give us. In order to be compliant with the Bank Secrecy Act (BSA) and guidelines from our regulator, the New York State Department of Financial Services (NYDFS), we have to be careful about who we service. Just like any other financial institution, we must ensure that we are following anti-money laundering (AML) and know-your-customer (KYC) laws that have been agreed to globally by the Financial Action Task Force on Money Laundering (FATF) which includes members from 38 countries, including China and the US. These are all givens within the world of financial services, but they are concepts that are newer to many in the crypto community—and that has caused some friction.
For example, a crypto blog wrote about users that were upset about their Paxos Standard (PAX) accounts getting shut down. Obviously, no business wants to deny or stop customers from using their products. But to operate legally, there are certain customers we cannot take—in this case specifically, customers who are trying to circumvent AML/KYC rules.
After Huobi recently instated $10k PAX withdrawal limits, some customers began structuring withdrawals to get around them; they were creating accounts under other people’s names who were not the owners of the funds to try to withdraw more PAX than the $10k limit – as many as 30 accounts in the same day. We saw the suspicious behavior, investigated and once we realized what was going on (including customers admitting this behavior), our compliance team found it was necessary to shut their accounts. We generously honored their redemptions but can’t allow it to happen it again.
Fortunately, this affected less than 2% (less than $4mn) of PAX redemptions in the past 4 months since we launched. The vast majority of our customers operate in good standing and 95% of weekday redemptions of PAX are processed in half a day, on average.
In fact, with over $200mn in redemptions to date, PAX has processed the most redemptions compared to other USD stablecoins launched this year (GUSD, TUSD and USDC) largely due to our fast, free and no-limit daily redemptions processing which only PAX offers. We offer these services for the benefit of people acting in good faith, and who can always trust us to act responsibly.
We believe that regulation in this space is very important and crucial for crypto to be adopted in a more mainstream and widespread way. We are committed to leading the way forward with transparency and accountability for the entire industry, and to continue to explore these topics, we’ll share more thoughts about this through our four-part series on Regulation in the Crypto World.
Stay tuned for the second installment, from our Chief Compliance Officer, Dan Burstein, who will take a deeper dive into what it means to be a regulated stablecoin.
Paxos Standard: A Regulated Stablecoin Means Playing by the Rules
Why Regulation is Becoming More Important in 2019
The Benefits and Trade-Offs of Regulation in Crypto