The increasing number of released stablecoin projects continues to surprise the crypto market, dividing the communities into two sides. One of the projects has recently gone over the circulating critics about its system and got listed on Binance.
The crypto community turned their attention to the newly launched stablecoin project Paxos (PAX). Users start to comment regarding the platform after it has successfully listed on the world’s largest cryptocurrency exchange by 24-traded volume- Binance. Paxos led to a wave of controversy after information on a “back door” via which law enforcement can easily freeze users’ funds went public.
The ‘back door’ was found by John Backus, one of the Ethereum community’s members who identified it in the code and shared on Twitter:
John Backus pointed out later that this aspect is beyond the Know-Your-Customer standard that should be followed by such projects. He stated:
“I get we need compliant stablecoins, but giving the government direct control to the smart contract seems excessive. Less extreme alternatives: Normal legal process. Gov requests freeze/seizure, PAX judges and fulfills, Allow LE to freeze, but require PAX to confirm burning.”
A representative of Paxos elaborated that the identified back door is part of the federal regulations. The declaration states:
“Paxos has always been compliant as a core principle,” the spokesperson stated. “We believe that there is a healthy market — especially amongst institutional investors who are also regulated and can only work with financial institutions like ours — who prefer to work with regulated and compliant entities and want the protection and stability of the government. We have always been clear that this is our approach.”
The spokesperson went on claiming:
“In the initial announcement about approval from our regulator, the New York State Department of Financial Services, they clearly stated that we were approved based on stringent requirements that we implement, monitor and update controls to prevent Paxos Standard from being used in connection with money laundering, terrorist financing or other illegal activities.”
While this back door is part of the US regulations, it involves high-security issues. At the beginning of September, Nomadic Labs released a research of the Paxos code, indicating that the back door represents an unavoidable security break that hackers can take advantages of.
“Being able to freeze the systems is a desired capability to keep the token KYC friendly. However, the current implementation doesn’t protect against front running. A highly sophisticated attacker might observe non-settled freeze attempts in the blockchain and race it with a transaction to transfer the coins from the being-frozen address to a second address in a cat-and-mouse game.”
Author: Adriana Midrigan