Binance’s Stablecoin Under Fire: Circle Sounds the Alarm to NY Regulators

Circle, a payments organization based in the United States that is responsible for the production of the stablecoin USD coin (USDC), stated that the major cryptocurrency exchange Binance did not feel completely back certain of its own stablecoin proxies. On Monday, the blockchain infrastructure platform Paxos received instructions to sever its link with the cryptocurrency exchange Binance in regard to the stablecoin known as Binance USD (BUSD).

A person familiar with the situation was quoted by Bloomberg as saying that Circle told the watchdog that it had found some problems in blockchain data that showed Binance did not have enough cryptocurrency on hand to support the number of tokens it had given out.

Then, last night, the New York State Department of Financial Services (DFS) said that it is in charge of Paxos and that,

“DFS has told Paxos to stop minting Paxos-issued BUSD because of several unresolved issues with Paxos’ oversight of its relationship with Binance in regards to Paxos-issued BUSD.”

It also said that the DFS gave Paxos permission to put BUSD on the Ethereum blockchain.

“Binance-Peg BUSD is not issued by Paxos and has not been approved by the Department for use on any blockchain. At the time, there are no limits on how DFS-licensed entities can list or trade Paxos-issued BUSD in New York.”

An NYDFS spokesperson told Bloomberg that Paxos couldn’t run BUSD “in a safe and sound way” and that it “failed to address key deficiencies,” which meant that the Department had to take more action and order Paxos to stop minting Paxos-issued BUSD.

Cut the line to Binance.

Then, on February 13, Paxos said it was going to stop working with Binance for BUSD. Paxos will stop making new BUSD tokens on February 21, as “directed by and in close coordination” with the NYDFS. A Circle representative didn’t want to say anything.

Paxos said, “Paxos Trust will continue to handle BUSD dollar reserves.”

It also said that BUSD would be fully supported and redeemable by onboarded customers until at least February 2024. Paxos customers could redeem their funds in USD or convert BUSD to Pax Dollar (USDP).

The DFS said that it is keeping a close eye on Paxos to make sure that the company can “make it easy for people to get their money back in an orderly way.”

Last September, Binance began automatically changing deposits of USDC and other stablecoins into BUSD. This caused Circle’s share of the stablecoin market to go down.

A spokesperson for Binance said that, because of the Paxos change, the exchange would stop minting new Binance-pegged BUSD, but it won’t change the above-mentioned auto-conversion policy. Binance-peg tokens, also known as B-Tokens, have always been 100% backed, they said, adding that reserves were not always visible because they were not kept “in a single, dedicated wallet in real-time.”

After Paxos made its announcement, the CEO of Binance, Changpeng Zhao (CZ), tweeted that “funds are SAFU.” The exchange will keep supporting BUSD for “the foreseeable future,” and it will make changes as needed over time, such as maybe not using BUSD as the main trading pair.

“BUSD is not an investment.”

In a separate statement released on Monday, Paxos said that the US Securities and Exchange Commission (SEC) plans to sue them because BUSD is not a registered security.

CZ said that if BUSD is ruled to be a security, the decision would “have profound effects on how the crypto industry will develop” in these places, and Paxos said that,

“Paxos completely disagrees with the SEC members because BUSD isn’t a security under federal securities laws. […] We will talk to the SEC staff about this issue and are ready to go to court if we have to.”

After all of this, Binance’s BNB coin fell from $314 (UTC) on Monday morning to $284 (UTC) on Monday evening. Since then, it has gone back up to almost $294 as of Tuesday morning. Overall, it went up 0.6% in a day and down 9.6% in a week.

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