(Kitco News) - The U.S. government continues to ramp up its oversight of the cryptocurrency ecosystem as the stablecoin issuer Paxos Trust Co. has become the latest company to be probed by regulators looking to bring the industry to heel.
Bloomberg reported on Friday that Paxos, which is responsible for the issuance of Binance’s BUSD stablecoin – the third largest stablecoin on the market with 16.16 billion tokens in circulation – is now under investigation by the New York State Department of Financial Services (DFS), according to a person familiar with the matter who asked not to be identified.
DFS is tasked with regulating the stablecoin issuer, which also issues its own stablecoin – Pax Dollar (USDP) – as well as PAX Gold (PAXG), a tokenized form of gold. Paxos acquired a BitLicense in 2015, which allows the company to legally conduct digital currency-related activities in the state of New York. Kitco Crypto reached out to Paxos for a comment but did not receive a reply before the time of publication.
Further details about the scope of the investigation have not yet been provided, and a spokesperson for DFS said the regulator cannot comment on an ongoing investigation.
“The department is in continuous contact with regulated entities to understand vulnerabilities and risks to consumers and the institutions themselves from crypto market volatility we are experiencing,” the spokesperson said.
Based on recent actions taken by regulators, there are several possible reasons that Paxos may be under investigation. Ever since the collapse of the algorithmic stablecoin TerraUSD in May, regulators have been taking a closer look at stablecoin projects in an attempt to verify the collateral that backs the tokens.
Paxos’ website highlights a focus on consumer protection and says that reserves for BUSD and USDP are held wholly in cash and US Treasury bonds. Both of the stablecoins in question are designed to maintain a peg with the U.S. dollar and, for the most part, have managed to do so throughout the turmoil in the crypto market over the past year.
Another possible motive behind the investigation is centered more on Binance and its relationship with U.S. regulators. The world’s top crypto exchange by volume has had a rough go with U.S.-related entities in recent weeks, having to halt all USD transfers beginning this past Wednesday as its banking partner discontinued services.
In December, reports emerged that prosecutors with the U.S. Department of Justice were delaying the conclusion of a long-running criminal investigation into Binance out of fear that it would negatively affect the crypto market, which had already experienced a disastrous year of losses. It’s possible that the recovery experienced across the crypto market so far in 2023 has diminished those concerns, allowing U.S. regulators to directly target the exchange.
In response to this latest development, Binance issued a statement saying, “BUSD is a 1-to-1 backed stablecoin that is one of the most transparent stablecoins in existence,” and added that it will continue to monitor the situation with respect to Paxos.
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Recent rumors that Paxos was ordered by the U.S. Office of the Comptroller of the Currency (OCC) to withdraw its application for a full banking charter have been refuted by the company via a Twitter post:
“To clarify speculation: Paxos has not been asked to withdraw its application for a national trust bank charter from the OCC, nor has it been denied the charter. Paxos continues to work constructively with the OCC,” the stablecoin issuer said.
The company received preliminary approval to operate a national trust bank in April 2021.
The DFS has been one of the more active cryptocurrency regulators in the U.S.. In January, Coinbase Global reached a $100 million settlement with the regulator after it was charged with allowing customers to open accounts without conducting adequate background checks, which violates anti-money-laundering (AML) laws.
Later that month, the DFS issued a new set of guidelines for crypto firms licensed in the state on how they should handle customer assets in order to prevent losses, including a requirement that they segregate corporate funds from users’ virtual currency holdings both on-chain and in the “internal ledger accounts” of the company’s custodian.
