According to Paxos, the PayPal USD stablecoin (PYUSD) presents itself as a fortress of stability, with the issuer revealing that it is fully backed by substantial assets. In its transparency report, Paxos detailed the robust financial framework supporting PYUSD, PayPal’s new stablecoin operating on the Ethereum network.
As of August 31, 2023, the total assets held in custody for PayPal USD were confirmed to “reach or exceed the token balance,” amounting to a total of $44.4 million, while the total notational position was slightly higher at $44.5 million.
As all transactions are overcollateralized, the risk of loss is not deemed significant.
A closer look at asset allocation
The transparency report revealed that the majority share of PYUSD assets – $43 million, representing nearly 97% of the total assets – is backed by reverse repurchase agreements of U.S. Treasuries managed by Paxos for the benefit of PYUSD holders. A reverse repurchase agreement, a formalized contractual commitment between two entities, typically involves one party agreeing to sell securities to another at an agreed price, with a promise of repurchase.
Paxos clarified its strategy around these agreements, highlighting their partnership with esteemed financial institutions, providing maturity and overcollateralization using U.S. Treasuries. This method significantly mitigates the risk of material loss, allowing Paxos to liquidate the Treasury collateral to recover costs in the event of counterparty default.
Risk mitigation and cash reserves
The report further disclosed an amount of over $1.5 million as fiat currency held in insured depository institutions, classified as cash deposits. While Paxos acknowledged the absence of active private deposit insurance policies, it emphasized the security measures in place to protect against potential bank insolvencies, thus providing a layer of security for PYUSD holders.