Paxos Trust Company Seeks Federal Trust Bank Charter
Paxos Trust Company, known for its role in powering PayPal’s PYUSD stablecoin, is making a significant move in the financial landscape. The company has submitted an application to transition its New York limited-purpose trust charter to a U.S. national trust bank charter. This marks a renewed effort after their previous application expired in 2023.
Potential Advantages of a Federal Charter
Should Paxos secure the federal charter from the Office of the Comptroller of the Currency (OCC), it would enable the company to manage customer assets and facilitate payments on a nationwide scale, operating under federal supervision. This could significantly enhance its attractiveness to institutional clients seeking reliable and regulated partners. Unlike traditional banks, however, a national trust bank is restricted from accepting cash deposits or issuing loans.
“OCC oversight will help build on our historic commitment to maintaining the highest standards of safety and transparency,” stated Charles Cascarilla, Paxos’ co-founder and CEO.
Paxos’ Journey Towards Federal Oversight
Initially, Paxos applied for this charter in December 2020 and received preliminary conditional approval from the OCC in April 2021. This approval set the stage for Paxos to fulfill several pre-opening conditions, including capital adequacy, compliance, and operational benchmarks.
However, OCC guidelines dictate that conditional approvals lapse if the bank is not operational within an 18-month window, unless an extension is granted. Consequently, Paxos’ approval expired on March 31, 2023. Throughout this time, Paxos continued its operations under the New York limited-purpose trust charter it has held since 2015, expressing continued interest in federal oversight when the conditions align.
Regulatory Challenges and Recent Developments
While Paxos did not specify the reasons behind the expiration of its initial charter, the period was marked by increasing regulatory scrutiny. Notably, in February 2023, the New York Department of Financial Services (NYDFS) instructed Paxos to cease issuing Binance USD due to compliance issues, intensifying the spotlight on the company and leading to the termination of its partnership with Binance.
This regulatory scrutiny culminated in a settlement last week, where the NYDFS reached a $48.5 million agreement with Paxos. The company was accused of failing to meet anti-money laundering standards in its dealings with Binance. The settlement includes a $26.5 million fine to the state of New York and an additional $22 million investment in enhancing its compliance program.
Paxos’ renewed application aligns closely with the recent passage of the GENIUS Act, which provides a federal framework for stablecoin issuers. This move also follows a trend of charter applications from other prominent stablecoin issuers like Ripple and Circle, indicating a broader industry shift towards federal regulation.
