(Kitco News) -
The Securities and Exchange Commission’s crypto crackdown moved into stablecoins yesterday when Paxos Trust revealed they were ordered by the New York Department of Financial Services (NYDFS) to stop minting Binance’s BUSD token. Binance founder Changpeng Zhao responded by saying BUSD was a Paxos product and the regulator’s actions had nothing to do with them. But according to a new report published today, Binance may have been the problem with BUSD all along.
A Bloomberg report claims that Circle Internet Financial, issuer of the USDC stablecoin and Paxos’ closest competitor, shared blockchain data its team had gathered with the NYDFS that purported to show that Binance was failing to maintain sufficient reserves to back the number of BUSD tokens it had issued.
Circle is also regulated by the NYDFS, and the complaint was made in Sept. 2022, shortly after Binance implemented a new policy that automatically converted all USDC deposits held on the exchange into their own BUSD stablecoin. As Binance was and remains far and away the largest cryptocurrency exchange in the world, this move significantly decreased Circle’s share of the stablecoin market.
Following an investigation by the NYDFS and the SEC that lasted through the November collapse of number-two exchange FTX and the ascendance of Binance to a near-monopolistic position in the global crypto market, the regulators finally brought the hammer down on Paxos, ordering them to end their issuance of BUSD.
When news of the Paxos decision broke, CZ was quick to distance himself from the issuer and minimize Binance’s involvement with the BUSD token.
“We were informed by Paxos they have been directed to cease minting new BUSD by the New York Department of Financial Services (NYDFS),” he wrote. “Paxos is regulated by NYDFS. BUSD is a stablecoin wholly owned and managed by Paxos.” He also added that “The lawsuit is between the US SEC & Paxos.”
The wording of the NYDFS statement on their action, and today’s revelations about the complaint that initiated it, suggest that U.S. regulators saw Binance and not Paxos as the bad actor in this.
The NYDFS cited “several unresolved issues related to Paxos’ oversight of its relationship with Binance in regard to Paxos-issued BUSD.”
The regulator explained that while they “authorized Paxos to issue BUSD on the Ethereum blockchain,” they did not authorize “Binance-Peg BUSD on any blockchain, and Binance-Peg BUSD is not issued by Paxos.” This directly contradicts CZ’s assertion that Paxos is the solely responsible for all BUSD.
The statement also implies that there was merit to Circle’s allegations that the BUSD Binance created when they implemented their auto-conversion in September was not fully backed by U.S. dollars or comparable assets. “Pursuant to DFS requirements, all stablecoins issued by DFS-regulated entities are required to be fully backed 1:1 by cash or cash equivalents,” they wrote.
Binance mints billions in ‘Binance-peg’ or ‘B-Tokens,’ which are its own versions of third-party coins like Bitcoin, Ether, USDC and USDT, and it deploys them on its own BNB Smart Chain. But Binance has acknowledged that they have failed to maintain 1:1 collateral for these B-tokens, with the Bloomberg source claiming that “on one occasion, Binance only had $100 million in stored collateral to support $1.7 billion in Binance-peg USDC.”
If Paxos was licensed to issue BUSD on Ethereum and obliged to maintain audited records proving 1:1 backing, but Binance effectively issued BUSD on their own exchange through conversion without licensing or proofs of reserves, then this would explain the nature of the “unresolved issues” the NYDFS cited in Paxos’ relationship with Binance. Paxos, a U.S. regulated entity, is ultimately on the hook to redeem every BUSD in existence for a U.S. dollar, but they cannot maintain effective control over issuance, or maintain effective oversight of reserves, for the BUSD being created on Binance’s platform and blockchain.
Because Binance is not a U.S. entity, the only way for U.S. regulators to address Paxos’ exposure to this opaque pool of BUSD is by banning them from any issuance relationship with Binance.
In an ironic twist, the forced conversion of all the USDC on the Binance platform to BUSD in September to gain market share will ultimately result in the forced conversion of all BUSD in existence to competing stablecoins like USDT and USDC and the loss of all market share.
A Binance spokesperson said Monday that the exchange will no longer mint Binance-peg BUSD, but they plan to maintain their auto-conversion policy for stablecoins and other cryptocurrencies.
