The third largest stable coin by market cap and pegged to the US dollar, BUSD, has come under fresh scrutiny, along with the world’s largest exchange Binance. The regulatory grip on BUSD issuer Paxos Trust rolled Binance beneath the wheel of the ongoing turbulence in the crypto market.
New York financial regulators have ordered the crypto firm Paxos to stop issuing Binance-branded USD (BUSD) stablecoin over concerns that it can’t “safely” issue the token. The news surfaced when the Securities and Exchange Commission (SEC) labeled BUSD tokens as unregistered security.
In response, Paxos expressed disapproval with the SEC’s allegations that Binance USD is a security and is “prepared to vigorously litigate if necessary.” Some reports begin circulating in the media pointing that the SEC sued Paxos for violating investor protection laws.
The move entangled Paxos in a potential lawsuit from the SEC over the BUSD token and later the company also confirmed that it received a Wells notice, a letter that SEC sent before the lawsuit enforcement to inform companies or individuals. However, it is unclear yet whether the notice was issued against listing tokens or issuing tokens or both.
What led to the Paxos-BUSD controversy?
The New York Department of Financial Services (NYDFS) brought to light that blockchain data revealed Binance did not have enough reserves to back up the BUSD tokens it had issued through Paxos. The Paxos-BUSD became a contentious issue among the crypto community when NYDFS began investigating Paxos due to concerns about its relationship with Binance.
In an escalating regulatory effort, NYDFS instructed Paxos to stop minting BUSD citing “several unresolved issues related to Paxos’ oversight of its connection with Binance through Paxos-issued BUSD.
The NYDFS announcement came after a tip-off from Binance’s rival Circle issuing a complaint last year about Binance’s mismanagement of reserves for its token. Previously, the regulator ordered another stablecoin issuer to halt its partnership with the trading platform.
Soon after falling under regulatory scrutiny, Paxos tweeted that existing BUSD tokens are fully-backed. It also stated that tokens are redeemable through Paxos Trust Company, ensuring all BUSD are always backed 1:1 with US dollar-dominated reserves held in bankruptcy remote accounts.
However, to comply with regulations, Paxos announced that it will cease issuance of new BUSD tokens as directed by NYDFS to prioritize the safety of its customers’ assets. Paxos also said that BUSD will remain redeemable to onboarded customers through at least February 2024.
New and existing Paxos customers will be able to redeem their funds in US dollars or convert their BUSD tokens to Pax Dollar (USDP).
Binance Response on SEC vs Paxos lawsuit
Paxos came in partnership with Binance in 2019 to launch the token, which got approval from the NYDFS at the time. However, Binance CEO Changpeng CZ Zhao reiterated on Twitter that “Paxos is regulated by NYDFS and BUSD is a stablecoin wholly owned and managed by Paxos.”
As Paxos has been directed to cease minting new BUSD by NYDFS, BUSD market cap will only decrease over time. CZ cited that Paxos assured Binace that funds are SAFU and fully covered by reserves in their banks, with their reserves audited many times by various audit firms already.
Prior to US SEC plans to file a lawsuit against Paxos, Circle claimed that BUSD was an unregistered security. On February 3, 2023, SEC issued a Wells notice to Paxos, stating that the agency is considering recommending an action alleging that BUSD is a security and that Paxos should have registered the offering of BUSD under federal securities laws.
Following which, Paxos said that it disagrees with SEC because BUSD is not a security under federal securities laws and Wells notice pertains only to BUSD.
Paxos backed its argument saying, “Paxos has always prioritized the safety of its customers’ assets. BUSD issued by Paxos is always backed 1:1 with US dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts. We will engage with the SEC staff on this issue and are prepared to vigorously litigate if necessary.”
Market Impact : BUSD De-pegs
The withdrawal cascade followed the NYDFS ordering Paxos to halt issuing the $16 billion BUSD stablecoin. The sudden withdrawal was partly driven by looming enforcement action by the US SEC.
With the increased regulatory scrutiny of the crypto industry prompted by high profile exchanges blow-ups, Paxos also came into the radar which resulted in BUSD de-pegging. The whole scenario also affected the value of Binance Coin (BNB) which saw a 7.5% drop in price.
While SEC targeting Paxos, Binance’s stablecoin partner, over concerns that BUSD might be considered a security, other stablecoin issuers are also on alert to not meet the same fate.
In the aftermath of recent events, BUSD would be wiped off the face of the crypto market, leaving another dent in the already crumbled ecosystem. This move could also be a major market correction, since we are yet to see where stablecoin as security debate will lead.
