Investigation a further blow for cryptocurrencies

Paxos Trust Co, issuer of a Binance-branded token that ranks as the third-largest stablecoin, is being investigated in the US in the latest regulatory escalation to hit the cryptocurrency sector.

The New York State Department of Financial Services was probing Paxos, a person familiar with the matter said, asking not to be identified discussing private information. The exact scope of the investigation is unclear.

Paxos, which also issues its own stablecoin called Pax Dollar, didn’t immediately respond to a request for comment. A spokesperson for the regulator said it couldn’t comment on ongoing investigations.

“The department is in continuous contact with regulated entities to understand vulnerabilities and risks to consumers and the institutions themselves from crypto market volatility we are experiencing,” the spokesperson said.

Paxos is regulated by the New York State Department of Financial Services. The firm on its website stresses consumer protection and says reserves for both stablecoins it issues are held wholly in cash and US Treasuries.

Stablecoins are intended to hold a set value, for example US$1, and come in a variety of forms. Some are underpinned by a matching reserve of assets such as cash and bonds.

Stablecoins have led to controversy because of past failures. The TerraUSD ecosystem, a stablecoin that relied on complex algorithms and trader incentives, suffered a US$60 billion ($94.30b) wipeout last year that roiled crypto markets.

Paxos, based in New York, operates Binance’s BUSD in a partnership with the world’s biggest digital-asset exchange. The token has a US$16b market value, making it the largest stablecoin after Tether and USD Coin, according to CoinGecko.