Paxos, the company that issues the branded Binance USD (BUSD) stablecoin, has been instructed to stop issuing the stablecoin by its regulator.
“Paxos has informed us that they have been directed to cease minting new BUSD by the New York Department of Financial Services (NYDFS), BUSD is a stablecoin wholly owned and managed by Paxos,” Binance said in a statement. “As a result, BUSD market cap will only decrease over time. Paxos will continue to service the product, manage redemptions, and will follow-up with additional information as required.”
Update:Paxos confirmed that BUSD will be redeemable until at least February 2024. It will continue to issue the Paxos Dollar (USDP) stablecoin, so the NYDFS instruction seems to be purely related to Binance USD.
The NYDFS has issued a statement in which it says the order was “as a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance in regard to Paxos-issued BUSD.”
The Wall Street Journal and Bloomberg first reported the news.
Paxos is a regulated trust company with a conservative approach to managing the BUSD backing assets, the third largest stablecoin with a market capitalization of $16 billion. The Binance exchange holds more than 80% or $13.5 billion of the tokens. Paxos stores the reserve asset in Treasuries and bank balances.
Paxos issued BUSD versus pegged BUSD
As we noted in an article on Friday, Paxos only issues the stablecoin on the Ethereum blockchain, but Binance issues pegged tokens on other blockchains. The NYDFS reiterated that NYDFS does not regulate these pegged tokens. Our article also highlighted some past discrepancies in the backing of the Binance pegged tokens.
The NYDFS has been overseeing the BUSD until now. In a statement from Paxos to Ledger Insights in January, Paxos told Ledger Insights, “The NYDFS must approve our BUSD operations, including the blockchains on which BUSD tokens may be listed. Today, BUSD is approved for issuance only on Ethereum.”
On Friday, Bloomberg reported that the NYDFS was probing Paxos and the Wall Street Journal reported yesterday that Paxos had received a Wells notice warning of impending legal action by the Securities and Exchange Commission (SEC). The grounds relate to violating investor protection laws.
SEC Chair Gary Gensler has previously stated that “stablecoins also may be securities and investment companies.”
The irony is that the more conservative stablecoin issuers are likely to be the easier targets because they desire to be compliant. In contrast, Tether, the largest stablecoin and also regarded as the riskiest, is largely offshore.
Paxos has always positioned itself as a compliant and institutional firm, as evidenced by its relationship with PayPal and major institutions such as Citadel Securities, Schwab and Fidelity that are backing new institutional crypto exchange EXDM.
Circle issues the second largest stablecoin USDC. Its assets are largely held in a money market fund managed by Blackrock, with custody by BNY Mellon.
The big question is why BUSD is being targeted first. One can only speculate. One possibility is that Paxos associates are not as heavyweight as Circle’s. Another relates to the BUSD association with Binance in the eyes of consumers and regulators wishing to get ahead of potential future risks.
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