Proposal: Add PYUSD and USDG as a USDe Backing Asset and Eligible Asset for the Reserve Fund

steakhouse
Tue, 23 Sep 2025 07:51:29 +0000
General

Summary

The Risk Committee is opening discussion on the addition of PYUSD and USDG as eligible assets for the Reserve Fund and as backing for USDe.

Both tokens are issued by Paxos under the same contractual framework, with fully reserved, bankruptcy-remote structures and monthly third-party attestations. Their reserves are conservatively composed of cash and short-dated U.S. government securities, designed to provide high liquidity and stability.

Each product offers clear redemption mechanics and transparent reporting, though yield is retained by the issuer and governance is centralized, consistent with regulated stablecoins.

On balance, we view PYUSD and USDG as suitable candidates for inclusion, with a phased approach allowing allocations to scale while monitoring adoption, liquidity, and redemption performance.

PYUSD

Legal and Structural Framework

PYUSD is issued by Paxos Trust Company LLC, a New York limited purpose trust company supervised by the New York State Department of Financial Services. Paxos received its trust charter in 2015, then known as itBit, Paxos became the first New York State chartered limited purpose trust company to receive approval from the DFS to specifically engage in virtual currency activities. Further, Paxos is subject to regulatory oversight by the Monetary Authority of Singapore and is licensed as a major payment institution as of 2022.

NYDFS, Paxos Licenses

NYDFS guidance sets the floor for issuers under its supervision. The stablecoin must be fully backed by reserve assets whose market value equals or exceeds outstanding supply of tokens, daily. NYDFS explicitly restricts reserves to cash deposits, US Treasuries or reverse repos collateralized by US government securities. Reserves must be segregated from issuer assets and held with an approved US depository institution and asset custodian. NYDFS also insists that issuers must confer a right of timely par redemption to lawful holders as well as to publish monthly attestations.

Guidance

Further, Paxos commits contractually under its USD Stablecoin Agreement to hold one dollar or permitted dollar asset in segregated accounts for the benefit of token holders. Notably, the same agreement permits Paxos Trust Company to suspend new issuance, assess fees on reserves and limit the one to one redemption at par to verified customers.

Paypal is engaged as a noteworthy distributor of PYUSD, supporting usage on their PayPal and Venmo platforms, among others. However, operational separation exists between the issuer and distributor, as all notices ultimately direct users to Paxos terms.

The backing assets for PYUSD are custodied directly by Paxos Trust Company, LLC. Under the NYDFS regime, reserves are legally required to be segregated and bankruptcy removed, with NYDFS empowered to intervene in the event of insolvency.

Paxos provides additional disclosures that custody may be conducted through segregated omnibus accounts, commingling the holdings of customers. We note KPMG LLPs monthly attestation to the state of said segregated custody.

While the trust company wrapper provides statutory segregation, operational custody is concentrated among a limited set of U.S. banks including the highly reputable State Street Bank and Trust Company and smaller for crypto friendly Western Alliance Bank and Customers Bank. We further note, that Paxos discloses cash balances may at times be in excess of FDIC limits.

The scope of custodial functions are consolidated with State Street for the majority reserve assets including cash, treasuries, and as the single repo counterparty. State Street Bank and Trust Company is a Massachusetts-chartered trust company and member bank of the Federal Reserve system. They are regulated by the Federal Reserve, Massachusetts Division of Banks, FDIC and the SEC in the US, among others.

The implications of this arrangement reduce complexity and concentrate all operational and counterparty risk in a single institution. While any disruption at State Street would affect both the custody and liquidity of reserves, State Street is among the strongest counterparties.

Reserves

PYUSD reserves are structured to meet NYDFS stablecoin guidance, with monthly attestation by KPMG confirming the sufficiency and makeup for our evaluation. The composition is straightforward with the majority of reserves placed in overnight reverse repo backed by US Treasuries, supplemented by cash balances at US commercial banks.

As of July 31, 2025: Source

The repo-heavy structure delivers daily liquidity but introduces dependency on counterparties. Repo agreements are overcollateralized which materially mitigates direct credit exposure, but the reliance on daily rollover means redemption capacity is tied to repo market functioning and the willingness of dealers to renew positionsWhile stress in the repo market could test the resilience of this model, we view the risk as immaterial give Paxos size with the total market sized at nearly 12 trillion in recent FED estimates.

Collateral quality is another point of comfort, as Paxos has historically disclosed monthly collateral exposures made up of a diversified basket of long dated treasuries. Taken together the repo structure provides ample liquidity with conservative collateralization.

PYUSD maintains a reasonable portion of reserves in commercial bank deposits to provide for immediate liquidity for redemption. While demand deposits frequently exceed FDIC insurance limits of 250K, Paxos has procured $ 50 million of excess deposit insurance through its captive insurer, Paxos Insurance Company Ltd.

Paxos previously identified the deposit institutions as major commercial banks such as State Street Bank and Trust Company, Western Alliance Bank and Customers Bank, representing a mix of global custody providers and regional commercial banks. Unlike repo, these deposits represent pure credit exposure to the banks, only partially mitigated by the captive policy.

In aggregate the reserves are simple, transparent and designed to be highly liquid, subject to a single large repo counterparty.

Liquidity and Redemption

PYUSD has seen meaningful adoption in TVL, which is a prerequisite for any reasonable adoption as a Backing Asset.

Source

DeFi liquidity has not had the same success as prior incentive campaigns trailed off, so too did meaningful balances in liquidity pools across Ethereum and Solana.

Source

PYUSD on-chain liquidity is thin, but major exchanges, Coinbase and Kraken, have listed it.

While liquidity metrics are useful context, we expect any meaningful redemptions to occur directly with the issuer. Redemption mechanics with the Paxos do offer USD at par, for verified users. While Paxos does not guarantee 24/7 minting and redemptions, they do commit to process redemptions on a one-to-one basis typically within T+0 to T+2, depending on banking cutoffs and compliance checks. Large withdrawals may extend beyond two days. In light of the cash buffer and highly liquid repo reserve, we view these commitments as reliable. Even in a rapid redemption wave, Paxos should be able to earnestly meet liquidity requirements, should the backing of PYUSD not diverge.

On balance, PYUSD liquidity is more dependent on timely repo conversion and banking throughput than on-chain mechanics, but offer a compelling commitment under NYDFS oversight and a highly liquid repo reserve. We would consider exposure as a function of issuance size, with prudent sizing similar to other Reserve Fund assets, but do not express meaningful concerns here given the regulated mandate for redemption at par and the underlying reserve makeup.

Transparency & Reporting

Paxos provides a relatively high standard of transparency for PYUSD compared to many issuers. Monthly attestations are conducted by KPMG. These reports are published within weeks of month-end and follow AICPAs criteria for stablecoin reporting.

Reserve disclosures include portfolio breakdown by asset type, including references to demand deposit counterparties and specific CUSIPS of repo collateral. Notably, due to the lack of on chain reserves, wallet addresses cannot be relied upon, elevating the importance of the reserve attestation.

An important nuance in reporting is that PYUSD does not pass through any yield to holders. Paxos explicitly states that stablecoins “are not designed to create returns or profits for holders” and all interest earned on reserves is retained by Paxos and Paypal as a distribution partner. We note this as a clear contrast to other new backing assets that the committee has considered with yield embedded in the product itself. However, we would also note the strong financial backing of Paypal and Paxos as a result of their various issuances without yield, making them notable counterparties. Of note, Steakhouse did not attempt to underwrite the financial health of Paypal, Paxos or any of their affiliates.

Governance

PYUSD is issued and redeemed exclusively by Paxos Trust Company. Decision rights for issuance, reserve management and redemption reside with Paxos as the sole issuer and fiduciary. This authority is further reinforced in Paxos stablecoin terms, which govern minting and redemption, allowing Paxos to suspend or delay issuance and redemptions as may be necessary or required by law.

In effect, centralization is explicit. Mint and burn authority, and the power to restrict underlying dollars is consistent with a regulated trust issuer, but is safeguarded by NYDFS guidance which again requires several material safety mechanisms, namely, redemption at par, segregated reserves with an approved custodian and routine attestations.

Security

PYUSD on Ethereum uses a proxy ERC20 implementation consistent with Open Zeppelin proxy semantics pre EIP 1967. The published repository documents a SupplyControl for mint and burn, a Pausible owner for halts and an Asset Protection role that can freeze balance, deliberate compliance features that centralize issuer control.

Security review coverage includes two noteworthy third parties, Trail of Bits and Halborn. We note that Steakhouse has not formally performed a bytecode analysis or evaluated the configurations of the protocol to further validate the robustness of the protocol.

Source

In short, risk vectors are straightforward. Centralization risks exist, but are by design. Proxy upgradeability concentrates technical change control.

Conclusion and Recommendation

PYUSD is conservatively designed with clear legal and structural protections under NYDFS with bankruptcy remoteness. The balance sheet is highly liquid, built on overnight repo and reputable commercial banks. Redemption commitments are credible, but bound by banking hours and compliance checks. Transparency is robust, though yield is retained by the issuer. Governance and security are intentionally centralized and consistent with a regulated issuer, supported by independent audits.

On balance, we support PYUSD as a backing asset and recommend continued monitoring of market depth and asset utilization as allocations expand.

USDG

Legal and Structural Framework

USDG is jointly issued by Paxos Digital Singapore PTE. Ltd. (Paxos Digital) and Paxos Issuance Europe Oy (PIE). Paxos Digital holds a Major Payment Institution (MPI) license from the Monetary Authority of Singapore (MAS), authorizing it to issue stablecoins and provide cross-border money transfer and e-money services. PIE is licensed by the Finnish Financial Supervisory Authority (FIN-FSA) as an Electronic Money Institution (EMI), subject to EU electronic money and payments regulation. Both licenses impose capital adequacy, safeguarding and conduct obligations but differ materially from the New York limited purpose trust framework that governs PYUSD.

USDG is governed by the same contractual backbone covering PYUSD, Paxo’s USD Stablecoin Agreement, which again obliges the issuer to hold one U.S. dollar or permitted debt instrument for every token in circulation, in segregated accounts for the benefit of holders. Similar to PYUSD, it allows the issuer to suspend new issuance, delay or refuse redemptions under certain conditions, and retain all income generated by the reserve assets.

Custodial responsibilities for USDG are split geographically. In Singapore, Paxos Digital holds reserves at DBS Bank, Ltd, the largest Singaporean bank, which is supervised by MAS. DBS is rated among the strongest banks globally and provides fiduciary safeguarding under the Payment Services Act regime.

In the European Union, PIE holds reserves with Banking Circle S.A, a Luxembourg based institution supervised by the Luxembourg Commission de Surveillance de Secteur Financier (CSSF). Banking Circle specializes in cross border settlement for regulated fintechs and EMIs.

Reserves are thus held in licensed banks in each jurisdiction. However, unlike PYUSD, USDG’s custody is fragmented across two jurisdictions with distinct regulatory regimes. Under both MAS and FIN-FSA frameworks, emoney/ stablecoin issues must segregate customer funds from corporate assets and safeguard them at approved institutions. In the event of insolvency, customer assets are not available to satisfy claims of the issuer’s creditors. As a caveat, we note in a stress scenario that the fractured regulatory and custodial environment would add complexity and require coordination between multiple agencies and jurisdictions.

Reserves

USDG reserves are structured under MAS and FIN-FSA safeguarding requirements with attestation provided by Enrome LLP to confirm a modest surplus margin.

As of July 31,2025: Source

The cash allocation represents roughly ⅔ of the reserved base and is the principal source of liquidity for redemptions. This design ensures immediate access to funds and is subject to statutory safeguarding rules under the Payment Services Act and E-Money Directive. We note the improved credit profile in these circumstances compared to deposits with commercial US banks, ensuring bankruptcy remoteness.

The treasury allocation, roughly ⅓ of reserves is composed of bills maturing within weeks of the reporting date. This design minimizes risk and ensures securities roll quickly into cash. This approach minimizes reliance on repo rollover as well as additional counterparty risk.

Taken together, USDG reserves are simple, conservative and highly liquid, despite being built with a materially different character than PYUSD.

Liquidity and Redemption

USDG has grown quickly since launch, with supply surpassing $500 million across Ethereum and Solana by mid-2025. Supply expansion has been steady, with Solana now accounting for a majority of circulation, while Ethereum remains an important but smaller venue.

Source

The redemption framework mirrors PYUSD in broad design. Verified customers can redeem USDG at par, typically within T+0 to T+2 settlement depending on banking cut-offs and compliance reviews. Large withdrawals may take longer, but the reliance on a cash heavy reserve structure improves immediacy.

In secondary markets, USDG liquidity is quite thin, increasing reliance on the primary redemption mechanism. Ultimately, we would expect any reliance on USDG to be sized conservatively, in line with other reserve fund assets given limited secondary liquidity and reliance on primary redemption.

Transparency & Reporting

USDG publishes monthly redemption asset reports, with July 2025 reviewed by Enrome LLP under Singapore assurance standards. These attestations provide further detail on asset composition down to individual Treasury CUSIPs and maturities. This level of disclosure is strong relative to many stablecoin peers and broadly consistent with the standard Paxos applies across its product suite.

That said, USDG’s reporting framework does differ from PYUSD’s. The attestation is performed under Singapore’s SSAE 3000 assurance standards, not the AICPA criteria used for PYUSD. While both involve professional scrutiny, the NYDFS mandate for CPA-level monthly attestations under U.S. attestation standards is stricter in scope and cadence.

Yield treatment is consistent with PYUSD. All returns from reserves accrue to Paxos Digital in Singapore and PIE in Europe, with token holders entitled only to par redemption. This reflects Paxos’s design choice to emphasize stability and compliance rather than investor economics.

Governance

USDG governance is divided between Paxos Digital Singapore and Paxos Issuance Europe Oy, each regulated locally by MAS and FIN-FSA. Both entities exercise mint and burn authority, subject to statutory safeguarding obligations. Unlike PYUSD’s single-jurisdiction model, governance here depends on coordination across regulators in Singapore and Europe. This adds a layer of redundancy but also creates fragmentation: neither MAS nor FIN-FSA has sole oversight of the product globally. Token holders again have no governance role, with Paxos retaining the ability to suspend issuance or delay redemptions as permitted under the contractual terms.

Security

USDG contracts are deployed across Ethereum, Solana, and Ink, using the same Paxos-standard ERC20/SPL/Ink architecture as PYUSD. The contracts are implemented through a proxy pattern, allowing upgrades, and include administrative controls for mint, burn, pause, and address-level asset protection. This provides the issuers with the same technical means to enforce compliance with legal directives.

The architecture is consistent with earlier OpenZeppelin-based proxies (pre-EIP-1967) and concentrates upgrade authority with the issuer. Paxos’ engagement with third-party auditors (e.g., Trail of Bits, Halborn) similarly apply to these token contracts. Steakhouse has not independently validated the deployed bytecode of USDG with the aforementioned audits.

From a risk perspective, the vectors are straightforward. Centralized control of upgrade keys and freeze functionality is reliant on Paxos. These are deliberate design trade-offs, to ensure compliance and responsiveness within their regulatory environment.

Conclusion and Recommendation

On balance, USDG is a suitable backing asset in moderate size. Its reserve design is simple, high quality and highly liquid, similar to PYUSD. We support the addition of USDG as a backing asset in moderate size and recommend monitoring the development of USDG secondary markets and asset utilization.

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