The New York Department of Financial Services (NYDFS) is probing crypto exchange and stablecoin issuer, Paxos, possibly over whether it was meeting rules around custody of client crypto assets.
Per a Bloomberg report, the full scope of the investigation is unclear. But the US regulators have been questioning crypto firms over their practices around handling clients’ digital assets. The probe has gathered pace in the wake of the collapse of Sam Bankman-Fried’s crypto empire.
Paxos Trust is the issuer of its own stablecoin, Pax dollar (USDP), and Binance-branded stablecoin BUSD, the third-largest stablecoin.
An NYDFS spokesperson declined to comment on ongoing investigations but told CoinTelegraph that “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.”
After the collapse of the Terra algorithmic stablecoin in May, which wiped billions off the broader cryptocurrency market, NYDFS refocused attention on the $150 billion stablecoin industry. Since then, regulators have been concerned that stablecoins without sufficient reserve-backing are prone to bank runs.
Paxos is a New York-based exchange and stablecoin issuer, whose status as a licensed financial services company in the US allows it to offer different products, such as crypto trading and settlement, and custody services. Further, the firm can issue tokenized securities and provides its customers with access the traditional banking system.
The unique position has enabled Paxos to sign big enterprise clients, such as Interactive Brokers, Revolut, Crédit Suisse, Société Générale and StoneX. It has also joined forces with the world’s most influential crypto exchange, Binance, to secure the NY regulator’s approval to launch a USD-backed stablecoin.
Separately, New York regulators are investigating Gemini over “false and misleading” claims the Winklevoss-owned exchange had made about whether client funds are insured by the government.
The New York Department of Financial Services (NYDFS) said Gemini’s communications with Earn customers contained ambiguous terminology that their GUSD stablecoin deposits are protected by the Federal Deposit Insurance Corporation (FDIC) coverage.
Gemini customers said that the exchange failed to distinguish the FDIC status of its own bank deposits and customers’ high-yield program. In other words, those statements implied that FDIC insurance was available for Gemini Dollar (GUSD) holdings, while the agency does not insure brokerage accounts.