The New York Department of Financial Services (NYDFS) has confirmed it is investigating Paxos, the issuer of PayPal USD (PYUSD), following a catastrophic minting error that temporarily created $300 trillion worth of unbacked stablecoins. The incident, which occurred on 15 October 2025, is being described as one of the most severe operational lapses in the digital asset sector to date.

According to on-chain data, Paxos was conducting what should have been a routine internal transfer worth $300 million between company-controlled wallets. However, a misplaced decimal point turned the transaction into a $300 trillion issuance, briefly inflating PYUSD’s circulating supply to levels surpassing the global GDP.

While the company swiftly reversed the mint, burning the excess tokens within an hour and confirming that no user funds were impacted, the episode has nonetheless sparked deep concerns about the robustness of controls within regulated stablecoin frameworks.

NYDFS Intervention and Industry Fallout

The NYDFS has stated it is in contact with both Paxos and PayPal to evaluate the incident and ensure no underlying systemic risks persist. This response mirrors growing regulatory apprehension about how operational mistakes, not just cyber threats, can destabilise digital financial systems.

The comparison with traditional finance was immediate. Many industry observers recalled Citigroup’s infamous “fat-finger” error last year, when the bank accidentally credited a client with $81 trillion. Yet, the Paxos case far exceeded that blunder in scale and implications, given the programmable nature of blockchain-based assets.

A former Salesforce engineer, Sam Ramirez, explained that the problem arose when Paxos attempted to remint burned tokens into the original wallet but inadvertently executed the command with the wrong input value, leading to the colossal overminting.

Though the situation was corrected quickly, analysts warn that the event underscores a fundamental risk: centralised control within supposedly trust-minimised systems.

Proof of Reserve Debate Reignited

In the aftermath, industry experts began revisiting the role of Proof of Reserve (PoR) technology in preventing such catastrophes. Zach Rynes, Chainlink’s community liaison, argued that real-time PoR could have entirely prevented Paxos’ mistake.

“Had Chainlink Proof of Reserve been integrated into the minting function, the system would have halted the transaction automatically,” Rynes said. “It only allows new tokens to be issued if corresponding off-chain collateral is verified first.”

The suggestion sparked debate across crypto communities and regulatory circles. Many believe mandatory, on-chain PoR validation for all regulated stablecoins could soon become a requirement, ensuring transparency and preventing “infinite mint” scenarios that could temporarily distort entire markets.

This renewed discussion comes amid an industry-wide shift toward tokenised real-world assets, where accurate backing and verification are paramount. As stablecoins increasingly underpin payments, DeFi lending and tokenised treasury systems, any failure in collateral validation mechanisms could have multi-billion-dollar ripple effects.

Collateral Questions and Market Reactions

Popular financial blog Zero Hedge quickly questioned the legitimacy of the process, asking, “What exactly was this $300 trillion in ‘stablecoin’ collateralised by mistakenly or otherwise?”

The query highlights a deeper issue: manual oversight in automated systems. If a single operator can mint unbacked tokens worth hundreds of trillions, even momentarily, it challenges the narrative of algorithmic trust and secure decentralisation that underpins the stablecoin ecosystem.

Adding to the intrigue, DeFi researchers pointed to suspicious timing, noting that the error coincided with PayPal’s new liquidity partnership with Spark and a $1 billion capital injection linked to tokenised U.S. Treasuries.

As one analyst posting under the pseudonym 941 remarked, “Everyone laughed at the $300 trillion mint as a bug, but it came just as PayPal realigned PYUSD with tokenised Treasuries. The timing suggests the ‘bug’ might be more than coincidence.”

Though there is no evidence of foul play, the speculation reflects growing unease about the intersection between traditional finance and blockchain infrastructure, particularly as major corporations enter the stablecoin arena.

Regulators Push for Stricter Controls

The Paxos incident has quickly become a case study in operational fragility. Despite the company’s regulated status and history of compliance, the episode underscores that even licensed issuers remain vulnerable to human error.

Data firm Santiment noted that the overmint caused “unusual on-chain activity” and highlighted the dangers of overreliance on manual processes in digital asset management.

For regulators, this may mark a turning point. The NYDFS and other agencies are expected to accelerate moves toward real-time auditing, automated issuance controls and mandatory integration of Proof of Reserve frameworks.

As the stablecoin market cap hovers near $310 billion, the Paxos mishap serves as a stark reminder: the greatest threat to financial stability in the digital era may not be hackers or exploits, but the fallibility of those operating the code.