14 February

Stablecoin issuer Paxos will stop minting new Binance USD (BUSD) tokens at the direction of the New York Department of Financial Services (NYDFS). It was reported on Sunday that the SEC intended to sue Paxos for selling BUSD as an unregistered security. This came only days after CoinDesk reported that Paxos was under investigation by NYDFS.

NYDFS said that it had instructed Paxos to cease minting BUSD due to several unresolved issues related to Paxos’ oversight of its relationship with Binance. Paxos said it is ending its relationship with Binance for BUSD.The Department is monitoring Paxos closely to verify that the company can facilitate redemptions in an orderly fashion subject to enhanced, risk-based, compliance protocols.’

In the past 24 hours, BNB Chain’s native token slid over 7% while BUSD saw massive inflows to crypto exchanges.

All BUSD tokens issued by Paxos Trust have and always will be backed 1:1 with US dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts.”

See Also: Regulator NYDFS Says Paxos Didn’t Administer Binance USD in ‘Safe and Sound’ Manner: Reuters
See Also: SEC to Sue Crypto Trust Co. Paxos Over Binance Stablecoin: WSJ

“Stablecoin issuer Paxos acknowledged that it has received a Wells Notice from the U.S. Securities and Exchange Commission, indicating a possible enforcement action based on the charge that its Binance USD constitutes an unregistered security.

However the firm said it ‘categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws.’ It also claimed that Paxos is ‘always backed 1:1 with U.S. dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts,’ and said the firm is ‘prepared to vigorously litigate if necessary.’

See Also: Coinbase ‘Will Defend Staking in Court if Needed’: CEO
See Also: SEC lawsuit against Paxos over BUSD baffles crypto community

Given that Binance only gave its brand to BUSD, Paxos’ decision is expected to have limited impact on the exchange’s finances. ‘The damage is likely mainly reputational for now, especially after phasing out USDC and other [stablecoins].’ It’s possible the Paxos withdrawal may not be the end of Binance’s stablecoin aspirations.

Binance may yet find another issuer for BUSD or find a different solution. There are still many variables at play, but for now we can expect traders to slowly start cashing out of their BUSD holdings.

After the news of the regulatory action broke, Paxos and Binance assured investors that BUSD redemptions will be honored until at least February 2024. ‘This did not stop traders from rushing to the exits.’

On Binance, the BUSD-USDT trading pair’s spot trading volume surpassed $3 billion in the past 24 hours, recording the largest daily volume since the November market crash induced by the implosion of FTX. In the largest BUSD pool on decentralized finance (DeFi) protocol Curve, where traders can swap between stablecoins, traders almost depleted the USDT, USDC and DAI liquidity. Now, 85% of the pool’s liquidity is BUSD.”

See Also: Binance to support BUSD while exploring non-USD stablecoins, CZ says
See Also: Binance Withdrawals Surge as Paxos-BUSD Drama Weighs on the Exchange

Bloomberg reported on Monday that Circle tipped off the New York Department of Financial Services (NYDFS) in the fall of 2022, complaining that blockchain data revealed Binance did not have enough reserves to back up the BUSD tokens it had issued through Paxos. Bloomberg cited a person familiar with the matter.

NYDFS instructed Paxos to stop minting BUSD due to concerns about its relationship with Binance. Paxos agreed to stop minting new BUSD tokens, but said in a press release issued Monday that all BUSD tokens it had issued were fully backed by U.S. dollar-denominated reserves.”

See Also: Binance USD’s $16B Market Cap Up for Grabs as Paxos Regulatory Action Stirs Up Stablecoin Rivalry

Had the U.S. Securities and Exchange Commission (SEC) laid out clear guidelines, centralized crypto exchange Kraken and its staking-as-a-service platform could have been within the purview of the regulatory agency, said Staci Warden, CEO of the Algorand Foundation.

Instead, Kraken is being punished, as opposed to given guidance.

Warden said that if Kraken’s protocol had been more of a ‘pass-through profit-taking from the underlying protocol,’ the agency might have been fine with Kraken. According to Warden, the broader issue is that regulation for crypto has yet to be defined.

They are trying to do the right thing,’ Warden said of the industry, pointing to Kraken and Coinbase as examples. ‘And with some better regulatory clarity upfront, they would have, in my view, probably done exactly what the SEC needed them to do.'”

See Also: Regulatory Backlash Will Lead to More DeFi and Offshore Crypto: Bernstein
See Also: While the U.S. engages in “regulation by enforcement,” Asia’s financial centers are developing clear-cut frameworks
See Also: Crypto’s Banking Problem: Industry Needs Access but US Regulators Keep Digital Assets at Bay