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Paxos—How the Global Financial Crisis Inspired the Creation of the NYDFS-Regulated Stablecoin

Charles Cascarilla is the CEO and co-founder of Paxos, a financial technology company working to modernize the financial system by digitizing and mobilizing assets. Paxos is building a future where all assets—from money to gold to securities— can be digitized and then moved instantaneously.

Before Paxos, Cascarilla co-founded institutional asset management complex Cedar Hill Capital Partners in 2005 and its venture capital subsidiary, Liberty City Ventures, in 2012. Earlier in his career, Cascarilla was a portfolio manager at Claiborne Capital and worked at both Bank of America Securities and Goldman Sachs.Following his panel engagement at The Capital by CoinMarketCap, where he took part in a discussion on the ‘Institutional Adoption of Crypto’, he sat down with Blockchain.News to discuss the impetus behind the formation of the Paxos Trust Company, its recently launched PAX Gold regulated digital asset and the current state of the stablecoin ecosystem.

Clogged Plumbing

Cascarilla comes from a traditional hedge fund background where his main focus was investing in financial services companies and managing private equity vehicles. Investing in the whole life cycle of financial services companies gave Cascarilla a 360-understanding of the limitations of the traditional market structure and fueled his conviction that he could improve upon the system using technology.

“Prior to the Global Financial Crisis, there was a big theme happening in the ecosystem regarding how the front end of markets and execution and trading were going to change. Then when the crisis hit, we saw how the entire plumbing of the financial system really locked up and exacerbated the situation.” he explained.

Cascarilla recalls being struck by the insanity of the situation—being able to trade in microseconds and then having to wait several days to settle a trade. It became apparent that the whole system needed to be reconfigured on a fundamental level, which could lessen the market’s reliance on centralized intermediaries and ‘too-big-to-fail’ institutions. He said, “Blockchain technology looked to us as a great solution to this fundamental contradiction of really fast trading on really archaic infrastructure. Not only would it solve these problems, but it would actually create more access and ability to create new products and new intermediation, but in a completely different way, when its decentralized.” He added, “Paxos was formed with this vision of creating a financial market infrastructure for an open financial system.”

Foundation of Trust

Paxos is a Trust Company regulated by the New York State Department of Financial Services (NYDFS), which according to Cascarilla, makes it like a bank but safer. He explained, “When assets are placed into our custody, it’s held bankruptcy remote and completely segregated. Many people don’t realize this, but when you deposit money in a bank—you’re actually making a loan to the bank and they then go and make more loans onwards.” He continued, “Setting up as a trust company, is a way to give our customers a huge level of confidence that when they send assets to us that they’re safe and they’re not being misused. And because we then tokenize those assets, you know that the underlying asset backing the token is still there.”

Paxos recently received a no-action letter from the U.S. Securities and Exchange Commission (SEC) allowing the company to move forward with its Paxos Settlement Service. Cascarilla said, “It allows us to tokenize US equities, in limited amounts, and so you can begin to see settlement for US equities on a blockchain. Those are all based on using the trust company as a regulated vehicle of safety and soundness, to then be able to transform assets into blockchain-based assets.”

Paxos Gold

In September 2019, Paxos introduced PAX Gold (PAXG), digital tokens backed by one fine troy ounce (t oz) of gold. This means that if you own a PAXG token, you own the underlying physical gold, held in custody by Paxos Trust Company. Cascarilla explained, “In the gold market, and any commodity market, there is a fundamental contradiction—on one hand, when the commodity is very liquid and very tradable then it is very much not the actual underlying asset. It’s a synthetic like ETFs or futures, it’s synthetic gold.” He added, “On the other hand, when you own the physical underlying gold bar in your backyard–it’s not liquid, it’s not divisible or easily transportable. It’s not even easily sellable because who even knows if that’s really gold.”

PAXG solves the problem of actual gold ownership while also creating the liquidity and fast traceability of synthetic products. Cascarilla concluded, “Part of the problem for gold and why it stopped being truly useful as money is because we all moved to a digitized financial system, but gold itself couldn’t really be digitized in a way that gave you true ownership. By putting gold on a blockchain, you can send us $1500 USD, and we will sell you an ounce of the highest quality gold and you will get a serial number that matches a physical gold bar stored in Brink’s Vault in London. So you have true ownership of the gold on a beneficial basis and yet at the same time, you can move that gold—24 hours a day, seven days a week to anybody with low fees and no storage costs.” He concluded, “That’s really fundamentally different to any way gold could be traded before—I actually think this is a complete sea change in the advocacy and efficiency of gold as a financial asset.”

ConsenSys Proposes Tokenization to Leverage Impure Public Goods

Naturally occurring public goods (e.g., water, forests, beaches) are often thought of as “free” public utilities—we do not expect to be “charged” for their use. People also tend to think of these public goods as virtually unlimited and we therefore rarely concern ourselves with the limited supply or providing equitable access and fair allocation of the public goods.A recent white paper published by ConsenSys reimagines the equitable allocation of public goods through blockchain and tokenization. The paper further seeks to introduce a new, fair method of tokenizing ‘impure’ public goods that carry some level of scarcity.Public Attitudes

People generally understand that human-made public goods—highways, airports, libraries—will incur some economic costs which must be recovered through some sort of fee, toll or charge. It is apparent, however, that the general public gives little thought to the actual policy decisions made in cost recovery schemes or the impact of cost recovery methodologies on the efficient allocation and utilization of these resources for the assets.Pure VS Impure Public GoodsEconomists sort public goods into two baskets—

1. “Pure” Public Goods—individuals can consume this type of good with without hindering the opportunity or access to that public good for others.

2. “Impure” Public Goods—consumption by one individual negatively impacts the ability of others to consume (scarcity) or excludes other individuals to some extent (excludability).

Public Goods Fee Structure Limitations

According to the paper, the support of impure public goods can create a separation of thought. People recognize that these resources are finite and must be maintained, but are still quite unwilling to accept charges for them. Parks, beaches and city infrastructure need to be maintained and not everyone can access them simultaneously and there are limitations on how available resources are allocated and costs are recovered. This makes the true values of impure goods and their optimal potential usage difficult to determine.

When a public body or government sets fees or tolls to maintain public goods, they tend to be flat amount that do not reflect the complex dynamics of the supply and demand equation. Furthermore, until recently, we have lacked the technological means to fully address the cost allocation issues of public goods at scale. Congestion Pricing Congestion pricing is a way of dealing with scarcity and excludability by adding a surcharge for services that are subject to temporary or cyclic increases in demand. Companies that engage in excess pricing are trying to regulate excess demand by applying higher prices during peak demand cycles. Congestion pricing would be a net new allocation structure in most cities. It may be applied to the existing infrastructures for which inhabitants are already paying and would not be expected to be conflated with other city services on both the cost and revenue side.Can revised pricing structures lead to better, more efficient, and safer usage of impure public goods? Consensys considers if markets for enumerable but finite usage rights for a wide variety of freely exchangeable “impure” public goods can be created using blockchain technology and “tokens.”

Proposed Token Model, Distribution and UsageIn the white paper, Consensys proposes a straightforward market-based congestion pricing model.Every resident of a city is issued a finite number of digital access tokens for the congested public area free of charge. For example—one access token per day for a year.

1. The tokens are valid for an agreed period (say, one year), and new tokens are issued periodically to eligible citizens.

2. Every driver of a vehicle needs to pay (i.e., transfer to the municipality), say one token, upon entering the congestion zone of the city during certain hours of the day. The access right of the token expires once the driver and vehicle leave the congestion zone.

3. Tokens are destroyed once used.

4. Drivers of vehicles can buy one or more tokens in an open marketplace.

5. Token prices are set in the marketplace based on supply and demand.

6. Algorithmic tools could be developed to allow travelers needing access but without tokens to simplify purchases by pre-setting parameters to various preferences.

7. The token can only be used to access the city’s congestion zone and nothing else.

Source: Blockchain in Public Goods Allocation – ConsenSys Solutions White PaperThe current flat pricing structures of impure public goods leads to inefficient economic outcomes. Implementing market-driven pricing and exchange structures as described in detail for congestion pricing could see numerous benefits.

For a more detailed and comprehensive overview of how tokenization can enhance fair access and opportunity for public utility, check out the full white paper.

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EY, Microsoft and ConsenSys Create a Platform For Enterprises on Ethereum Mainnet

Global accounting firm EY, have launched their open-source Baseline protocol which aims to address privacy issues to encourage enterprise adoption of public Ethereum.

Baseline was created by EY in collaboration with technology giant Microsoft and ConsenSys and is specifically designed for enterprises to build on top of the Ethereum public blockchain.

According to the announcement on March 4, the Baseline Protocols aim is to empower enterprises to adopt the public Ethereum blockchain for complex and confidential processes, without storing sensitive data on-chain.

John Wolpert of ConsenSys and Hyperledger Fabric explained, “This is not a platform. It’s not a product. It’s not a coin, a token. It is a way of using the main net (public Ethereum) that will be acceptable, we think, to very conservative corporate CSOs (chief security officers), CIO, CTOs, where they can finally say, yep, it’s okay to use the main net in this way.”

How the Protocol Works

The Baseline Protocol heavily leverages Zero-Knowledge Proofs (ZKP), a kind of encryption that is used to verify information without actually exposing the information.The Baseline Protocol started with a specific use case for volume discounts in a supply chain.

The release offered an example, “The volumes and the discount rates are not stored on the blockchain, but a zero knowledge proof is. As a partner, based on your volumes a smart contract will calculate the relevant discount rate. Critically, given smart contracts on a public blockchain are usually visible, with the Baseline Protocol, a competitor would not be able to see the smart contract contents or the volume discount details.”

The outputs are tokenized, although they are kept private. The release explained that tokenization makes transactions compatible with decentralized services offered on Ethereum. An EY spokesman explained, “So that the inputs and outputs are set up and being built out in such a way that we can access things like working capital for a purchase order or factoring of a receivable, without compromising the buyer or seller’s security and privacy.”

The Baseline protocol is aimed at firms offering customer relationship management and enterprise resource planning services without requiring any modification to legacy systems.

Tokenizing Municipal Bonds

ConsenSys recently featured on Blockchain.News when it was reported that the Ethereum development studio was making a move on the less glamorous and often-forgotten local municipal bond market. ConsenSys had acquired brokerage firm Heritage Financial Systems in an attempt to modernize the municipal bond market, which is notoriously error-prone and out-dated.

In an effort to place the traditional and inflexible municipal bonds market on the blockchain, ConsenSys intends to tokenize the $3.8 trillion municipal bonds market to allow local governments to raise funds and gain local investment more efficiently.

The company aims to tokenize municipal bonds (munis) in smaller denominations to enable local residents to invest in community projects. The tokenization will also decrease the high cost of managing, distributing, and selling mini municipal bonds.

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FUSANG Exchange Lists First Publicly Available Blockchain-Based Digital Bond Backed by CCB

Asia’s first digital security exchange FUSANG is partnering with the world’s second largest bank, China Construction Bank (CCB) to offer the first ever digital, tokenized, blockchain-based bond.

FUSANG’s First Digital Security IPO Revealed

CCB and FUSANG Exchange, Asia’s first digital securities exchange, take the lead to bring to market the first blockchain-based digital bond accessible to global investors

The bond, Longbond SR Notes USD (LBFEB21), is to be provided by CCB Labuan Branch at a discount and will be listed on the FUSANG Exchange on the Ethereum blockchain, supporting trading in USD or BTC. Regarding the digitalization of assets and its connection to cryptocurrencies like BTC—FUSANG Exchange CEO Henry Chong told Blockchain.News:

“There are a lot of people today trading crypto, and there are a lot of people who are licensed to list and trade securities on traditional stock exchanges, but as far as we’re aware, no one is actually directly bridging the two.”

This CCB bond represents the first digital security to be listed on a public stock exchange that is directly accessible to the public. This is an important step along the path towards the adoption of Fintech within traditional financial institutions, and further testifies to the value of blockchain technology in digitalizing traditional assets and utilizing cryptocurrencies.

What exactly is a digital bond?

As opposed to other digital assets on the market, this digital bond is a real digital asset in substance. Mr. Chong explained how the asset works as a traditional bond that has been “tokenized” and issued on a blockchain, as compared to other bonds issued by banks that are referred to as “digital” merely because they are exchanged via a mobile app, but aren’t actually held digitally. The difference is that one asset is fundamentally digital and written into the blockchain, while others are just exchanged via a digital medium.

Financial Inclusion through Digital Securities

The motivation for transforming traditional securities to digital ones lies in increasing their exposure to global retail investors, not just accredited and institutional investors. Mr. Chong stated, “What we’re bringing to the exchange is full transparency in the way that it’s not only a public IPO, but that both retail and institutional investors can buy in on a level playing field…global investors can now benefit from access to an investment previously reserved for only the largest institutions, together with low and transparent fees.”

This also speaks to FUSANG’s stated mission of financial inclusivity, allowing everyone from millionaire institutional investors to retail investors to have access to all kinds of securities and digital assets on a decentralized blockchain.

CCB originally approached FUSANG with the idea of creating a digital bond, which was born out of the recent Chinese financial interest in blockchain technology. According to Chong, CCB was instrumental in supporting their technological endeavor while helping with the legal and regulatory hurdles of the IPO process.

The Start of Crypto 2.0

“Crypto 2.0,” according to Mr. Chong, refers to the institutionalization of digital asset products ranging from securities like shares and bonds, to other assets like commodities and real estate. Essentially, in Crypto 2.0 any exchange of value can be tokenized and represented on a blockchain.

On the idea of “Crypto 2.0” and expanding crypto to include more than just currencies, Mr. Chong said:

“Blockchain based assets like Bitcoin were magnificent proof of concepts where they show that we could use this technology to represent assets, and that we could provide the blockchain that acts as a radically different record keeping settlement. I think assets like Bitcoin are very interesting, but as a company, our focus has always been on securities.”

Using blockchain and cryptocurrency to digitalize value will have a revolutionary effect on our economy, and will greatly enhance investors and others’ ability to transfer value. Chong remarked, “you can use the technology to represent all kinds of assets. I think we are showing the digital asset world, and the financial world in general, that digital assets don’t need to be wild, volatile, and risky things.”

FUSANG Exchange Announces CCB $3 Billion Digital Bond Listing Suspended

FUSANG exchange, Asia’s first digital securities exchange based in Malaysia, announced that the listing of what would have been the first blockchain-based digital bond has been suspended, following a request from China Construction Bank (CCB).

The listing of China Construction Bank’s Longbond SR Notes USD (LBFEB21) was initially scheduled to launch publicly on November 13. Supporting trades in both USD or Bitcoin, the initial public offering (IPO) for digital bond LBFEB21 was to be provided by the CCB’S Labuan Branch and listed on the FUSANG exchange leveraging Ethereum blockchain.

The digital bond was to be launched by China Construction Bank, the second-largest bank in the world. It was anticipated by many, as it would have been the first digital security to be listed on a public stock exchange for trade, accessible to retail and institutional investors alike.

The digital bond issuance was initially postponed to a later date, but after some time, China Construction Bank decided that it will not move forward with the listing of the digital bond, although there was nothing faulty with the IPO. No further explanations were given. CEO of FUSANG exchange, Henry Chong, shared with Blockchain.news:

“While we are disappointed that this Listing has been suspended, there were no legal, regulatory, operational, or technical issues with the FUSANG platform or the IPO process or filing.”

The FUSANG CEO has faith that the digital asset wave is stronger than ever, however. Though FUSANG has already begun the process of returning investors’ funds, the volume of investor interest in the IPO already speaks volumes about the rise of crypto adoption, in his opinion. He said:

“The overwhelming investor interest and demand for this landmark USD 3 billion program has been a fantastic validation of the digital issuance and listing process that we have created, and it is unfortunate the Listing Sponsor has decided that they are unable to proceed with this Listing (Longbond SR Notes USD).”

CCB originally approached FUSANG with the idea of creating a digital bond, a brainstormed epiphany inspired by the rise of blockchain technology in China. According to Chong, CCB was key in helping with the legal and regulatory hurdles of the IPO process.

Although this tokenized digital bond offering has been suspended, FUSANG is likely to partner with China Construction Bank again in the future, should the occasion present itself.

What is Crypto 2.0?

Currently, the digital securities exchange has been working hard to deliver “Crypto 2.0” to global investors with its unique platform features. The concept of Crypto 2.0 revolves around the idea that securities, digital assets, commodities, and other stores of value can be tokenized and represented on a blockchain; they can be transacted with at low and transparent fees. Institutionalization of digital asset products and access to investment products previously reserved for larger investors will be made available to all investors in Crypto 2.0, on the FUSANG exchange.

Blockchain and cryptocurrencies are sure to revolutionize the economy and lead the technological wave, enabling investors to easily transfer value and transact in a cashless manner.

Atlético Madrid, AS Roma and OG Crypto Fan Token Prices Plunge Following Binance Listing

Champion Esports team OG (OG), Atlético Madrid (ATM) and AS Roma (ASR) crypto fan token prices have begun to plunge immediately after being listed on Binance.

Binance has officially listed the ATM and OG and ASR fan tokens on its global exchange which has seen all three tokens dip in value within moments.

Less than two hours before the launch of the tokens, Alexandre Dreyfus, CEO of Socios.com tweeted his excitement:

“90 minutes before history day of listing 3 tokens at the same time on @binance.”

Around thirty minutes prior to the three new fan token listing on Binance— OG, ASR and ATM were already surging as traders anticipated the Binance launch. OG Fan Token had gained 29% in the 24 hrs before with a price of $18.97, while in the same period ASR was up 12.5% at the price of $24.17 and ATM was up 12.75% and priced at $27.03 according to CoinMarketCap.

Following today’s listing on Binance, however, all three fan tokens listed today saw immediate decreases in price.

Thirty minutes after launching on the global cryptocurrency exchange OG token dropped 18% to a price of $12.27; ASR price plunged 32.88% to $13.87 ,and ATM fell 21.37% to a price $18.27.

While the fan tokens have only been available on Binance for less than an hour at the time of writing, the price action is no doubt disappointing as many traders were expecting similar price action to the recent listing of crypto fan tokens of football giants Juventus and Paris St-Germain which both made immediate gains

What are Fan Tokens?

The Atlético Madrid (ATM) and AS Roma (ASR) Fan Tokens both have a total token supply of 10,000,000 fan tokens, but what are they exactly?

These fan tokens are utility tokens that gives Atletico Madrid and AS Roma Football Club fans a tokenized share of influence on club decisions using Socios application and services. Socios.com is an app for football (soccer) fans, where users can acquire voting rights to influence the clubs they support by acquiring club-specific Fan tokens.

Fan tokens are a form of tokenized asset, that represents proof of ownership or even membership for holders. As tokens are already being used for a wide range of purposes, many specialized blockchains have been developed with native intent to support tokens, the most common of which is currently Ethereum and their ERC standard tokens.

Chiliz ($CHZ) is an ERC20 utility token on the Ethereum blockchain that serves as the digital currency for the chiliZ and Socios.com platform. In launching their platform, alongside other sports blockchain ventures, a new category of token has emerged — the Fan Token. Once onboard the Socios.com platform, yet to-be-announced club partners host what has been called a Fan Token Offering (FTO). Fans must purchase $CHZ via a cryptocurrency exchange in order to acquire Fan Tokens. These tokens — which are specific to a team or club — are a finite, digital asset that provide access to an encrypted ledger of voting and membership rights ownership.