4 Ways to Support Trustworthy Stablecoin Transactions - Paxos (2024)

A key reason for stablecoin’s surge in global popularity is its stability. Trust is intrinsic to that stability — users must know that a stablecoin will maintain its peg. Market confidence in this stability also hinges on transparency regarding the reserves backing the stablecoin, which is why many market participants deem regulated stablecoins as the most transparent (and most trustworthy) among digital assets.

Under the oversight of a prudential regulator, service providers must adhere to the highest consumer protection standards with regards to transparency and management of reserves in custody. To that end, regulators require independent monthly third-party reviews of reserves in custody and public disclosures attesting to reserve status.

The trust imbued in a regulated stablecoin extends to stablecoin transaction reliability. Users must trust that service providers execute transactions accurately, promptly and securely without the risk of losing or compromising funds.

How trust can be built-in to stablecoin transactions

Regulatory oversight plays a pivotal role in supporting trustworthy stablecoin transactions at every stage in a stablecoin’s life cycle. Regulated service providers must meet the demands of a framework that defines the rights, obligations and permissible activities related to stablecoin transactions. Adherence empowers holders to confidently store and transact value, free from the volatility associated with other cryptocurrencies.

Transactions involving a regulated stablecoin are also fortified by effective management practices that help support consumer protections at all points during the transaction.

Below are four key steps enterprises can take to ensure smooth and reliable stablecoin transactions.

1. Choose reputable stablecoin providers.
Partner with regulated, established and experienced stablecoin issuers or providers that have a proven track record of putting security first. Conduct thorough due diligence to assess their compliance with regulatory requirements, financial stability and security protocols. As part of this process, check for a public record of independent attestations and compliance reports.

2. Implement secure wallet solutions.
Utilize secure cryptocurrency wallets to store stablecoins and make transactions. Choose wallets with robust security features like multi-factor authentication, end-to-end encryption and hardware wallet integration options. Look for security reports to ensure the wallet’s reliability and safety.

3. Monitor transaction activity.
Implement real-time transaction monitoring systems to detect and prevent unauthorized access. Utilize machine learning or anomaly detection systems to identify unusual patterns that may indicate fraud or other suspicious activity.

4. Maintain regulatory compliance
Comply with regulations such as Anti-Money Laundering (AML) and Know-Your-Customer (KYC) requirements. Such frameworks can help prevent illicit activities and they’re critical to establishing trust and credibility in the global market.

Paxos is pioneering stablecoin trustworthiness

Paxos is subject to strict regulatory oversight by the New York State Department of Financial Services (NYDFS), meeting the highest standards of consumer protection. Under NYDFS supervision, Paxos stablecoin reserves are custodied in fully-segregated, highly liquid accounts, ensuring stablecoins such as PYUSD and USDP are always redeemable one-to-one for US dollars. This is how Paxos creates built-in trust in stablecoins and stablecoin transactions.

Stablecoins have the unique potential to combine the innovative aspects of cryptocurrencies with the reliability of traditional assets. Adhering to the four practices above helps ensure integrity with every transaction—and a smoother ride for all stakeholders.