As a result of the directive issued by the New York Department of Financial Services (NYDFS) to Paxos to cease the issuance of Binance USD stablecoins, other market participants have begun considering the repercussions.
Circle, the issuer of the second-largest stablecoin in the world, USDC, brought to the attention of NYDFS that it had alerted them the previous year about Binance's mishandling of deposits for its BUSD reserves.
According to the article (1) by Bloomberg, Circle notified the watchdog in the fall of last year, claiming that its team had discovered data on the blockchain, indicating that Binance did not have sufficient reserves to back the issued tokens.
Tokens such as BUSD, Binance-peg Bitcoin, Ether, and other derivative currencies meant to circulate on Binance's native network, BNB Smart Chain, are included in this category. The announcement was made just a few hours after the NYDFS ordered that Paxos cease issuing the BUSD stablecoin.
The NYDFS cited (2) "many outstanding problems connected to Paxos' management of its relationship" with Binance in connection to BUSD. A representative of the regulatory body sent the following statement to Bloomberg via email:
The New York Department of Financial Services concluded that Paxos could not operate BUSD "safely and soundly." This conclusion was reached after extensive supervising interaction, a recent examination, and Paxos's failure to remediate content problems about Paxos-issued BUSD in a timely fashion were taken into account.
Because Paxos did to resolve critical shortcomings, the Department was forced to take additional measures, which included directing Paxos to stop minting Paxos-issued BUSD. The Department is keeping a close eye on Paxos to ensure that it can allow redemptions in an orderly way while adhering to strengthened risk-based compliance measures.
Comparing Binance and Circle
There is no guarantee that Binance would refute the assertions made by Circle. Additionally, in the previous month of January, Binance admitted that there were instances in which the Binance-peg BUSD was not completely supported. It was reported that one billion dollars were missing from the company's reserves.
In their warning, Circle asserted that even the USDC was an uncollateralized asset on Binance at that time.
According to the individual that Bloomberg contacted, Binance previously supported $1.7 billion of Binance peg USDC by utilizing USDC collateral worth only $100 million, which was accomplished by employing USDC collateral.
Circle may benefit from the most recent enforcement action against the USD stablecoin on Binance. In a direct assault against Circle, the crypto currency exchange Binance decided in September 2017 to delist stablecoins backed by USDC.
Binance is having a hard time right now, even though the BUSD market share increased at the expense of Circle's USDC market share.
Binance may need to reevaluate how it treats stablecoins transferred to its platform now that authorities are phasing out support for the BUSD stablecoin.
In addition to NYDFS, the SEC is considering filing a lawsuit against Paxos on the latter's issue of Binance's BUSD. According to several reports, the SEC views BUSD as an unregistered security.
This could be the first regulatory escalation that targets a stablecoin issuer, but it might be a huge one. The SEC will likely provide explicit restrictions on stablecoins this year.