The anchor chain on the tech billionaire's vessel damaged 80 per cent of the coral reef in Grand Cayman's West Bay replenishment zone, officials said.
Divers were inspecting the site to assess the damage, and Mr Allen, who is worth $18.1 billion (pounds 12.6bn), could face a $600,000 fine or a prison sentence of up to a four years.
"It's not going to depend at all on whose vessel it is, or what assets they have," said Scott Slaybaugh, deputy director of the department of the environment. "It's the value of the reef and that's what we take seriously, so the consequences would be the same for anyone."
He said Mr Allen was not on board Tatoosh - one of two yachts he owns - on January 14, when the crew dropped anchor on the reef in the West Bay protected area.
The ship was reportedly diverted by shifting winds towards the reef, before it was moved to avoid damage.
"Vulcan Inc and Paul G Allen have a long history of responsible exploration and a commitment to ocean conservation," Mr Allen said in a statement issued through Vulcan, his project management company. He said the ship was moored in a position "explicitly directed by the local port authority".
"When its crew was alerted by a diver that her anchor chain may have impacted coral in the area, the crew promptly, and on their own accord, relocated their position to ensure the reef was protected," the statement added.
"Vulcan and the ship's crew are actively and cooperatively working with local authorities to determine the details of what happened. An investigation by local authorities is ongoing."
Mr Allen has in the past championed environmental causes. In 2014 he spent $2.6 million funding the University of British Columbia's Sea Around Us project to fight illegal fishing.
The statement emphasised that Mr Allen is "a global leader in supporting ocean health" through his support for cutting-edge research designed to stabilise and restore coral reefs.
The 63-year-old co-founded the computer company with Bill Gates, before leaving the frontline of the business to become an environmental campaigner and philanthropist, donating over $2 billion to support elephant conservation, Ebola eradication and research into brain diseases.
His two vast yachts have made him one of the most high-profile of tech billionaires, hosting lavish parties on board Tatoosh, at 300ft, and the 414ft Octopus, once the world's largest yacht.
Octopus, with a staff of 60, 41 suites, two submarines and a weekly cost of $384,000, is moored at Cannes every summer, playing host to celebrities such as actors Sharon Stone and Ryan Gosling, and models Lily Donaldson and Joan Smalls.
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