On September 5, 2019, the New York Department of Financial Services (“DFS”), the state’s top financial regulator, authorized and approved the issuance and offering of the first ever gold-backed virtual currency.
Paxos Trust Company, LLC (“Paxos”), a New York state-chartered trust company and custodian regulated by DFS, received approval from DFS to begin issuing and offering PAX Gold (“PAXG” or “token”) to investors. PAXG is a digital asset that is backed by, and pegged to the value of, physical gold; each token will represent the ownership of 1 fine troy ounce of London Good Delivery gold. The token’s value will be determined by the real-time market value of gold. Anyone who owns a PAXG token will own that portion of the underlying gold which is to be held under the custody of Paxos.
PAXG will be built as an ERC-20 token on the Ethereum blockchain, and all transactions will be governed by the rules of the token’s smart contract. Following the trend of other Ethereum-based tokens such as Pocketful of Quarters (“PoQ”) and TurnKey Jet, both of which have received no action relief from the Securities and Exchange Commission (“SEC”) staff, Paxos does not expect the token to be required to be registered as a security with the SEC. Although Paxos has not received—or even applied for—the same no action relief from the SEC staff as PoQ and TurnKey Jet, they have noted in their white paper that they have "secured the advice of legal counsel that PAXG should not be considered a security or futures contract under the federal securities and commodities laws."
DFS has established various conditions to ensure that the risks associated with the issuance and offering of the PAXG token are addressed. Paxos will thus be required to implement various policies and procedures to meet the state’s high standards for anti-money laundering, anti-fraud, consumer protection and cybersecurity.
The approval of PAXG further evidences DFS’s commitment to the supervision and promotion of financial services market innovations, especially with respect to digital assets and virtual currencies. While there are various existing products for investors to purchase ownership in gold such as ETFs and futures contracts, PAXG is the first successful attempt to create a digital representation of gold.
Blockchain technology utilizes a distributed digital ledger to record and track information, and can be leveraged to gain transparency and certainty in transactions ranging from cryptocurrency to supply chain tracking. This blog provides information on the legal developments surrounding implementation of blockchain technology, with an initial focus on the financial services sector.