In response to a lawsuit filed by the SEC, stablecoin issuer Paxos ceased issuing Binance’s BUSD stablecoin. Previously, it was believed that the crackdown was part of the SEC’s current strong inspection of cryptocurrencies and crypto-related enterprises, but new details have emerged suggesting that another stablecoin issuer, Circle, is the main cause.
Last year, Circle, the operator of USDC, alerted the NYDFS about issues in Binance’s token reserves. According to an anonymous source, Circle had discovered—through blockchain data—that Binance did not have enough crypto in reserve to support the tokens it had issued.
Bloomberg reported that Circle complained to the NYDFS about Binance’s mismanagement of its token reserves, leading to an investigation by the NYDFS.
The suspension of BUSD was not related to the security or staking attributes of stablecoins but rather to Circle’s complaints about Binance’s mismanagement of its token reserves. Binance mints billions of dollars worth of its own versions of third-party coins to make them usable on other blockchains than the ones they were built for.
B-Tokens are supposed to be backed 1-to-1 by locked reserves of the coins they’re based on, stored separately from customer funds, and often do not involve any oversight from the original issuer.
The NYDFS determined that Paxos, which issues BUSD under Binance’s branding, was unable to operate BUSD safely and ordered Paxos to cease minting Paxos-issued BUSD.
A spokesperson for the regulator said that Paxos had failed to address key deficiencies, requiring further action from the department. The NYDFS is monitoring Paxos closely to ensure that the company can facilitate redemptions in an orderly fashion, subject to enhanced risk-based compliance protocols.
Binance acknowledged issues with under-collateralizing its version of BUSD and mixing together reserves for almost half of its B-Tokens with customer funds. The exchange admitted to mistakenly mixing together reserves for almost half of its 94 B-Tokens with exchange-customer funds.
