PayPal’s Ethereum-based stablecoin, PYUSD, has an asset back of 100%, according to a transparency report by stablecoin issuer Paxos. How true is this? For those not familiar with this concept, stablecoins are supposed to have equivalent backing in real world assets, to hold their value stable.
The total assets held in PYUSD custody either meet or exceed the token balance, Paxos claims in its report. Here, indicated as a sum of $44.4 million as of Aug. 31, 2023. Notably, the most significant portion of PYUSD’s asset backing comes from the U.S. Treasury reverse repurchase agreements held in Paxos custody. A reverse repurchase agreement refers to an agreement between two parties where one party agrees to sell securities to the other at a predetermined price with a commitment to repurchase.
This arrangement provides layers of interests to both parties, resulting in a win-win situation. Yet, is this model flawless? A common hypothetical concern in such scenario is, what if a default by the counterparty occurs? Paxos assured that in such an event, they can liquidate the U.S. Treasury collateral to recoup the loss as all trades are overcollateralized.
However, what exactly does the term “overcollateralized” indicate here? Just an added layer of cushioning between the loan and the loan’s value. One could argue that while this approach undeniably adds safety, it could take away from profits. Nonetheles, in a dynamic crypto market, safety often trumps over other considerations.
When it comes to the rest of PYUSD’s assets, $1,500,146 is held as fiat currency at insured depository institutions, colloquially known as cash deposits. However, an important detail to note here is that not all deposits are covered by the FDIC or private insurance, meaning that certain deposit types could incur losses if a bank becomes insolvent.
While this might seem alarming, it is more a reflection of the reality of banking rather than an anomaly with cryptocurrency alone. As with any financial decision, users ought to recognize the inherent risks and make their decision accordingly.
This report coming out into the open has laid bare some critical details about PYUSD’s operations. This might serve to assuage concerns in some investors, while raising skepticism in others. Still, featuring insight into the stablecoin’s backing, there could be a fair argument that it is stepping up the transparency game in the cryptocurency market.
Let’s not ignore the fact that PayPal and Paxos debuted their stablecoin barely a month ago. The optimized system of a stablecoin directly pegged to the USD might have enough appeal to claim considerable market share in the expanding universe of crypto enthusiasts. While there might always be skeptics, PYUSD appears committed to ensuring clarity and integrity in its operations – and that might just make all the difference.
Source: Cointelegraph
