The source for this article wishes to remain anonymous. He is one of multiple sources this reporter has spoken to recently. All of them are relatively large-scale traders who have used Paxos Standard. They are a group of five traders. They trade in the millions of dollars per week via multiple exchanges including Binance and Huobi. These are mentioned in this article but aren’t the subject of it.
Let’s start with some definitions. Paxos Standard defines itself as a “stablecoin.” Its tokens can be redeemed on a 1:1 basis for US dollars. Redemptions are transferred by traditional bank wire. The minimum is $100, on a set schedule that Paxos defines in its user terms and conditions. To its credit, this minimum is very low compared to Tether and others.
“Exchanges” are mostly either Binance or Huobi, which are the most-used platforms by the traders sourced in this article. It’s important to note that neither of these exchanges did wrong in the events described herein. They allowed withdrawals within their usual policies.
Paxos Withholds Funds A Week or More
At time of writing, Paxos Standard had been withholding funds from our source since December 23. This is the second time they have given him a significant hassle. Their customer support agents gave multiple reasons:
- They needed to know if he was the owner of the Ethereum.
- They questioned whether the use of multiple Binance-controlled addresses was legitimate.
- They questioned PAX withdrawals and deposits to Binance.
They demanded to know the exact nature of the counter-parties and owners of the PAX redeemed.
In one message, they accused the user of “misrepresenting” the origin of tokens. This trader is one of four whose accounts have been closed as a result of redemption.
Later support messages from earlier this week demand to know “more about your trading strategy.” CCN has reached out to NYDFS to see if this is even a legally sound question to ask.
All of the people discussed in this article held legitimate Paxos Standard accounts with itBit. Until their accounts got closed following sizable redemptions, that is. One remaining person’s account hasn’t been closed, but he has $1.1 million in limbo.
In every case, a similar pattern: the traders make deposits into Binance or Huobi and do what traders do. They acquire a payout through the preferred platform – Paxos Standard. They are then caught up in a whirlwind of questions, many of which are only tangentially important to the purpose of the stablecoin issuer.
What Are You Really Asking, Paxos?
Paxos Team says they aren’t protecting the market cap or acting punitively as regards the redemption of PAX. Yet, invasive inquiries raise the question: what is the issue?
CCN has spoken to other sources who have run into similar issues with Paxos. Paxos was not opposed to redeeming the tokens in these other cases. They did request that the redeemer “wait a week or so” to withdraw. They said it would be “bad for their business” to do so immediately. We interpret this to mean they didn’t want to take the loss in market capitalization. Their marketing message very much pushes the narrative that their market cap is nothing but growing.
We decided to take a look at the week’s volume of one specific case. One of the larger cases discussed in researching this article. A redemption of around $2.6 million was held for a week. Later Paxos sent the redemption and closed the account permanently. The week in question was that of December 6.
That week saw a reduction in Paxos Market Cap of almost $20 million in one day prior to December 6. On December 5, it was as high as 178 million but by December 6 it had been reduced to 161 million. At time of writing, it is around 147 million.
We did a Q&A with the person who best represents the group. He is a US-based trader who works with counter-parties in China and elsewhere.
When did you start trading PAX?
We started trading PAX in early November.
Why have you used PAX instead of other stablecoins?
Paxos were giving a rebate/discount to people to buy PAX, so it was trading at discount at Binance. So we bought at a discount and redeemed at full price to arbitrage.
About how much money have they held up, and for how long?
In one case, 2.5 million were held up for 1 week and our account was closed. In an ongoing case, almost 1.1 million is being withheld.
Why do you think PAX alleges to care about your account statuses on places like Binance – is it really any of their business whether or not multiple accounts are being used?
I think they just try to find some unrelated compliance reason to stop us from redeeming PAX. They asked a lot questions on out accounts on Huobi and Binance, even asked our counter parties’ information which is highly confidential. We never would disclose our counter parties’ information to anyone without their consent. They asked many questions and then closed our accounts. This is the way how they stop people from redeeming PAX and how they do business.
We reached out to Paxos Standard for comment on this article, and for what reasons they will withhold customer redemptions of PAX tokens for Dollar wire transfers. First this reporter tried to call them:
This is what Dorothy Chang, Paxos VP of Marketing & Communications had to say in response to the e-mail inquiry:
As a policy, we are proud to offer all customers in good standing daily redemptions with zero fees or limits (neither minimums nor maximums). Since launching less than 4 months ago, we have honored over $178M in redemptions of PAX 1:1 for USD and aim to continue to be the most reliable and proven method of crypto redemption. In fact, we have redeemed more USD stablecoin than any of the others that have launched this year (TUSD, GUSD, USDC, etc.). We’re known to be the most reliable, fastest and cheapest redemption source.
Yes, we have closed a few accounts, only for very good reasons. It’s all for the sake of AML/KYC compliance. While we don’t comment on the status of individual account activity, we can tell you about the patterns we’ve seen lately.
We’re obligated to understand the source of funds coming to Paxos for redemption. 100% of customers that clear compliance are able to redeem within a day. This applies for nearly all customers.
But when customer activity appears suspicious or the source of funds is unclear, we conduct enhanced due diligence. This can take a few days, depending on how responsive customers are to our information requests. In some cases, customer activity didn’t match with what they claimed. For example, we have identified customers who misrepresented to Paxos (or to an exchange they are redeeming from) the ownership of their PAX. Some even openly admitted to doing so. In those cases, consistent with our regulatory obligations, we processed the redemptions but also took other appropriate action, including closing accounts.
As a regulated financial institution and Trust company, Paxos maintains rigorous compliance standards to ensure that our customers’ assets are held under the greatest level of protections possible. Suspicious activity is never tolerated to ensure the integrity of customer funds and our operations. We’re proud to maintain high standards, which this industry needs to continue to benefit those acting in good faith.
For many customers, Paxos has been a great way to use the dollar in blockchain markets. It provides an easy on-ramp from traditional bank accounts to crypto trading platforms. Yet, for others it has been a nightmare, as reported here. We will not directly allege that their withholding tactics are part of a scheme to preserve their market cap numbers. Yet, we can see why the affected traders would believe so.
It is important to note that all of the people discussed in this article eventually had their redemptions honored except the one whose request is still pending. The downside was that they lost their accounts with which to do so. The fact that Paxos/itBit were able to eventually conduct the transaction raises the question: was there ever any reason for actual concern? This is why the traders understandably believe their funds were withheld for business reasons.
We encourage our readers to do their own research in choosing a stablecoin. CCN provides regular coverage of the various options.
Images from Shutterstock and anonymous sources.
Get Exclusive Crypto Analysis by Professional Traders and Investors on Hacked.com. Sign up now and get the first month for free. Click here.
Article First Published here