High Quality Reserves, Audits and Regulation – Sponsored Bitcoin News

High Quality Reserves, Audits and Regulation – Sponsored Bitcoin News

What is BUSD? Recently, there have been many questions about the safety and soundness of products in the crypto space. There have been many questions about stablecoins in general, so this piece is intended as an explanation of BUSD.

First and foremost, BUSD is a stablecoin pegged to the US dollar (USD) that came from a partnership between Binance and Paxos. BUSD is issued by Paxos Trust Company, a NYDFS regulated entity, on the Ethereum blockchain.

This regulated status comes with some conditions attached that limit the actions that Paxos is allowed to perform. This is in addition to NYDFS having the authority to evaluate Paxos’ operations and oversee the stablecoin.

BUSD was designed with three important areas in mind: high-quality reserves, audits and regulation. Here are some of the key principles behind how BUSD is run, spelled out in simple terms:

BUSD reserves are for token holders

The reserves do not belong to Paxos nor to Binance. They instead benefit the holders of BUSD. This means that Paxos does not own the principal within the BUSD reserve, does not mix it with corporate funds, does not have the ability to use these funds for other purposes, and must be able to clearly identify and separate the reserve at all times.

In short, it must be kept separate and safe. In the event of a bankruptcy of Paxos, the reserves are intended to benefit the BUSD holders, not the creditors of Paxos.

Paxos also uses custodians in major financial markets to hold the securities within the BUSD reserve, meaning that even if everyone at Paxos were to cease to exist, those securities and the dollars on deposit in the banks are still identifiable and traceable for the benefit of the token holders. Even in the unlikely event that this occurs, the assets are safe and secure and another entity will be appointed to liquidate the reserves and return the money to the BUSD holders.

Prudent management of BUSD reserves

BUSD is a US dollar stablecoin, and Paxos and Binance believe that BUSD itself should be as close to the representation of a dollar on the blockchain as possible. What this means is that BUSD’s reserves are kept extremely conservative, in the kind of instruments that did well even during the financial crisis of 2008. Additionally, beyond just Paxos’ preference, NYDFS rules and regulations prevent Paxos from investing the reserves in a more aggressive fashion beyond the assets listed here.

So what’s in reserve, exactly? Following:

  1. US Treasury bills with a maturity of 3 million or less. T-bills are obligations of the US government itself, backed by the full faith and honor of the United States. So far, the US government has never defaulted on its obligations. Equally important, by keeping the maturity of the instruments very low, even large movements in interest rates have little or no effect on the value of the T-bills themselves.
  2. Overnight Reverse Repo, which is an overly complicated way of saying short-term fully secured loans. ON Reverse Repo is as follows in a financial substance: Paxos has cash in reserve. Paxos lends the payout, on a nightly basis, to a creditworthy bank. However, banks, even good ones, fail sometimes. To provide additional security, Paxos also has collateral provided by the borrower in the form of US government bonds with a value greater than the loan, and if the counterparty defaults, Paxos can liquidate the treasuries to recover the funds.
  3. Bank deposits. This is exactly what they sound like: dollars on deposit in banks. There are two varieties of these in the BUSD reserve. The first is amounts at the custodian banks that hold securities for Paxos, as these securities sometimes mature and must be re-invested, or pay coupons or other interest. The second is amounts in banks that operate fast payment networks, which makes it easier for Paxos to provide 24/7 stablecoin coining and burning services, as traditional banking and securities markets are only open about 25% of the time (in an hour). basis weekly) while stablecoin operates 100% of the time. For the latter, Paxos also buys private market insurance on deposits in the event of bank failure.

That’s it! No other items may be in the reserves. There are also a couple of other restrictions on investment to keep the reserve as safe as reasonably possible:

  1. No influence. Paxos cannot borrow against the securities, invest them further, or otherwise expand the balance to increase risk.
  2. No credit risk instruments (except as mentioned with the bank deposits above). Paxos can only invest in the list above, so cannot own certificates, corporate bonds or anything else.

BUSD reserves are transparent

When you own a stablecoin, you should know what is in it. Paxos discloses the stablecoins reserves on a monthly basis so everyone can verify that BUSD is 100% backed by cash or cash equivalents.

Firstly, Paxos produces an unaudited monthly reserve within five working days of the end of the month. The rapid release of information to the public allows all token holders to have immediate knowledge of current investments.

Second is the attestation, where an auditor assesses the Paxos holdings and provides an attestation of the accuracy, completeness and fairness of the disclosures (now, including a review of the unaudited holdings). The exam is conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants.

In short, BUSD is conservatively invested, bankruptcy distant, transparent and, from a financial product perspective, pretty boring. This is a feature, not a bug, as in times of uncertainty simplicity and transparency matter more than when times are good and all prices are rising. BUSD is built to be as resilient as possible in downturns.

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