Binance stablecoin in jeopardy as US regulators force Paxos to stop issuing BUSD
On Monday, New York-based Paxos announced that it will end its partnership with crypto giant Binance and stop minting BUSD, a Binance-branded stablecoin created with the partnership of the two companies, effective February 21.
The decision is made later report that the Securities and Exchange Commission plans to sue Paxos, and because a order from the New York Department of Financial Services instructing Paxos to stop generating tokens.
The partnership between Binance and Paxos has made BUSD the third largest stablecoin by market capitalization and a formidable competitor to its two main competitors, Tether and USD Coin. With Monday’s announcement, the future of BUSD—and the stablecoin market in the United States—is in constant flux.
At a time of soaring interest rates, dollar-backed stablecoins also act as a stable source of income for crypto companies, including Binance and Paxos, in a broader bear market.
“Paxos continues to maintain strong regulatory capital to protect customers, as well as a strong balance sheet to support our long-term business goals,” the company said in a statement. declare. “This action does not affect our ability to continue to serve new or existing customers.”
The story of two companies
Paxos has long been known for its compliance with regulatory guidance. In 2015, it became the first company receive New York limited purpose trust charter for digital assets from NYDFS. In 2019, Paxos received authorization from the NYDFS to issue its first virtual currency approved by the agency—gold-backed PAX Gold, as well as BUSD, a dollar-pegged stablecoin. America.
For the latter, Paxos partnered with Binance, then a rapidly expanding crypto exchange with a rebel group looking to benefit from its reputation for being rules-compliant. Primarily an infrastructure company that white-labels products for other companies, Paxos also benefits from this partnership, with Binance potentially becoming one of their biggest customers. As a privately held company, Paxos does not publish financial statements publicly.
As Binance grew into the world’s largest exchange, it sought to challenge the dominance of the two largest stablecoins, Tether and USDC. In September 2022, the company announced it will start automatically converting the three major stablecoins, including USDC, into BUSD for the exchange’s customers. The market share of BUSD quickly skyrocketed.
Binance was also fired for managing BUSD, despite the reputation of its Paxos partner. Since Paxos is only allowed to issue BUSD on the Ethereum blockchain and not Binance’s proprietary blockchain (BNB Chain), Binance will issue a synthetic token called Binance-peg BUSD, where users can deposit BUSD and get back the compatible BNB Chain equivalent.
In January, researchers at blockchain analytics firm ChainArgos establish that Binance does not always hold enough BUSD as collateral for the synthetic Binance fixed BUSD token, which the company attributed to “operational delays.” Binance also later admit to store BUSD collateral in customer funds by mistake.
There is speculation that issues with the BUSD token pegged on Binance have led to a crackdown from regulators. In a consumer warning issued on Monday, NYDFS speak that they did not allow BUSD to be pegged to Binance on any blockchain, citing “several unresolved issues regarding Paxos oversight of their relationship with Binance” because of the decision to order for Paxos to stop minting BUSD.
The future of stablecoins
Paxos said it will continue to support BUSD so customers can exchange their funds in US dollars or convert to Paxos’ other stablecoin, Pax Dollar, until at least February 2024. A spokesperson for the company ty did not respond to a request for further comment Luck.
Binance Founder and CEO Changpeng Zhao said on Twitter that BUSD’s market capitalization will decline over time—it fell from a high of over $23 billion in November 2022 to around $16 billion in February amid doubts about stability. by Binance.
The DFS action could be just the beginning of regulatory headaches for Paxos. The company has a pending application with the US Office of the Comptroller of the Currency to become a national trust bank. Had rumor that the application would be denied, although Paxos has denied the allegations.
On Sunday, the The Wall Street Journal report that the SEC told Paxos it plans to sue the company for violating investor protection laws, alleging that BUSD is an unregistered security.
SEC has been ferocious in taking action against major crypto companies following the collapse of FTX, but this will be the first lawsuit against a stablecoin, which is not traditionally covered.”Howey’s Test” to define securities.
Gabriel Shapiro, general counsel of crypto firm Delphi Labs, speculate on Twitter that the SEC is targeting the most compliant stablecoin in BUSD due to Paxos oversight by the NYDFS, but the SEC is still likely to prevail in a follow-up lawsuit.
The lawsuit will also threaten the future of other US-based stablecoins, including the USDC issued by Circle.
Circle’s chief strategy officer, Dante Disparte, said: “The facts and circumstances under any given moment of legal action like this are different. Luck. “Circle affirms that USDC is a regulated dollar-denominated digital currency that is issued as a store of value in accordance with the remittance laws of the United States.”
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