The regulatory clampdown against the ailing crypto sector was turned up a notch in the US on Monday, adding a major stablecoin issuer and the world’s largest exchange Binance to the roster of digital-asset companies under fresh scrutiny.
(Bloomberg) — The regulatory clampdown against the ailing crypto sector was turned up a notch in the US on Monday, adding a major stablecoin issuer and the world’s largest exchange Binance to the roster of digital-asset companies under fresh scrutiny.
The New York State Department of Financial Services said it had directed Paxos Trust Co. to stop issuing new tokens of crypto’s third largest stablecoin, a Binance-branded coin known as BUSD that has roughly $16 billion in circulation. The move targeted two core pillars of crypto — its most-traded type of tokens and the biggest exchange offering them — in one fell swoop, showing how watchdogs are keen to get tough on the sector after years of relative inaction.
Last year’s market declines and high-profile blowups, including alleged fraud at bankrupt exchange FTX and crypto failures that burned big players and everyday investors alike, have added urgency to the task of oversight. The US Securities and Exchange Commission has also taken a stronger approach to crypto enforcement lately, seeking to challenge the crypto sector’s perception that its assets do not qualify as securities that must be registered. It settled with crypto exchange Kraken over its offering of so-called staking services last week, and has previously said that some stablecoins could be considered as securities.
Stablecoins like Paxos’s BUSD, Tether’s USDT and Circle’s USDC are crypto tokens that are intended to hold a set value, for example $1. They come in a variety of forms and some are underpinned by reserves like cash and bonds. Investors often park funds in stablecoins as they move between crypto trades, with around $136 billion currently in circulation.
As the third-largest stablecoin, BUSD has acted as a cog both in billionaire Changpeng “CZ” Zhao’s Binance ecosystem and the wider crypto sector, and Binance has moved to prioritize its use over other stablecoins in recent months on its exchange. Binance, which does not disclose where it is headquartered, has faced regulatory scrutiny and investigations in recent years across various jurisdictions, including the US. Like many of its rivals, the exchange has had to grapple with a lost of investor confidence over recent months, made worse by the sudden collapse of FTX.
“The Paxos story is certainly not good news for Binance as BUSD is an important conduit” for maintaining liquidity on its exchange, helping support the vast amount of trades on the platform, said Bradley Duke, co-chief executive at crypto exchange-traded products provider ETC Group. “The bigger question is, what is the SEC’s endgame here following last week’s crackdown on Kraken?”
The New York regulator said its decision was the result of “several unresolved issues related to Paxos’s oversight of its relationship with Binance,” adding that the department does not regulate a spin off token issued by Binance itself, known as Binance-peg BUSD, which relies on Paxos’s BUSD as collateral. Paxos said that it will end its relationship with Binance and cease issuance of BUSD from Feb. 21, though it will continue to support reserves for BUSD — a store of approximately $16.1 billion in cash and short-dated US Treasuries — and redeem tokens for customers for at least the next 12 months.
Paxos and Binance didn’t immediately respond to a request from Bloomberg for comment on the regulator’s statement.
- Read: Binance Concedes User Funds Mistakenly Stored With Reserves
Paxos could be facing a possible lawsuit from the SEC for violating investor protection laws, according to a Dow Jones story. The SEC has sent Paxos a so-called Wells notice alleging that BUSD is an unregistered security, the people said. Paxos in a statement Monday afernoon acknowledged the Wells notice, saying it “categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws.” Paxos also said there are “unequivocally” no other allegations against it.
Binance Pressure
The suspension of Paxos’s partnership with Binance will make it increasingly difficult for US customers to access Binance’s platform. Already, the exchange last week temporarily suspended US-dollar deposits and withdrawals via bank transfer after its partner Signature Bank said it would only handle large transactions of $100,000 or more. Several banks globally have stopped customers from sending funds to Binance for a number of years.
- Read: Binance to Suspend US Dollar Transfers Using Bank Accounts
Customer withdrawals of stablecoins from Binance spiked following the exchange’s initial announcement of its termination with Paxos, with roughly $183.8 million in stablecoins withdrawn from the platform after 8 am London time, according to data from CryptoQuant. Overall withdrawals also rose, with customers pulling out $462 million worth of cryptoassets from the exchange in the last 24 hours, according to an analysis of the platform’s reserves by Coinglass. This was the highest amount of outflows across all exchanges tracked by the data provider.
Binance Coin, the native token of Binance’s exchange, sank as much as 8.9% on Monday, reaching its lowest point since mid-January. Wider crypto markets dipped, with Bitcoin, Ether and an array of smaller tokens also down.
Around 19% of Binance’s reserves are held in BUSD, and 25.4% in BNB, according to an analysis of the platform’s data by DeFiLlama.
Binance began transitioning traders toward using the BUSD stablecoin last year by automatically converting deposits of most top stablecoins into the branded token, pushing up the share of BUSD on its platform. A Binance spokesperson didn’t immediately respond to a request for comment on whether this policy may change after Paxos’s announcement.
Binance’s CZ said in a tweet that the exchange would move away from using BUSD as the main trading pair on its exchange.
Swapping Out
A crackdown on BUSD could lead investors to shift to other stablecoins, according to Martin Lee, a data journalist at crypto intelligence firm Nansen.
“Technically BUSD can still function as what it is but given all the events that has happened, users would likely just swap to other stablecoins that aren’t directly under fire from the regulators,” Lee said.
It’s unclear whether the action against Paxos signals a wider probe of stablecoins as a whole. To the extent that stablecoins are a relatively new financial product using new technology for settlement and storage, “it was likely at some point that stablecoins’ position within legacy financial regulatory frameworks would be tested,” said Richard Galvin, co-founder of fund manager Digital Asset Capital Management.
Galvin added that he hopes “a regulatory position can be found that balances” the benefits of stablecoins against disclosure and user protection.
–With assistance from Joanna Ossinger, Suvashree Ghosh and Anna Irrera.
(Updates with Paxos acknowledgment of SEC Wells notice.)
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