Binance and crypto markets rattled when Paxos was ordered to stop issuing Stablecoin

Paxos Trust, which issues Binance USD – pegged and backed by the dollar – will end its relationship with the exchange and stop issuing BUSD as of February 21 following an order from the New York Department of Financial Services, Paxos said on Monday. The group added that it will continue to manage BUSD dollar reserves and that investors can redeem BUSD for Paxo’s own stablecoin, the Pax Dollar.

In a statement, the NYDFS said the order came “as a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance.”

The news follows a report by the Wall Street Journal over the weekend, citing anonymous sources, that the US Securities and Exchange Commission (SEC) had told Paxos it planned to sue the group for breaching investor protections. The SEC claims that Binance USD is an unregistered security, the Journal reported. The SEC declined to comment when reached Barron’s.

Paxos did not immediately respond to a request for comment early Monday.

“BUSD is a stablecoin wholly owned and managed by Paxos. As a result, the market value of BUSD will only decrease over time,” a Binance spokesperson said in an email to Barron’s. “Given the ongoing regulatory uncertainty in certain markets, we will consider other projects in these jurisdictions to ensure our users are insulated from further undue harm.”

Changpeng Zhao, CEO of Binance, addressed the issue on Twitter, clarifying that he had no information about an SEC lawsuit against Paxos. He added that if “BUSD is ruled a security by the courts, it will have a profound impact on how the crypto industry will develop (or not develop) in the jurisdictions where it is ruled as such.”

Regulators have increased their scrutiny of crypto companies over the past year. This was in the wake of a series of business failures, some amid allegations of fraud – such as lender Celsius and exchange FTX – and surging digital asset prices have rocked the space.

Binance, by far the largest place for crypto trading, is an obvious target, as are stablecoins. Stablecoins such as Tether, Circle’s USD Coin and BUSD, which are typically pegged to the US dollar, play a crucial role in crypto markets, providing investors with a platform for the digital asset universe and serving as a key source of liquidity. Their connection with traditional finance and critical position in crypto have made stablecoins a central part of US lawmakers’ efforts to regulate digital assets.

“Stablecoins have become crypto’s mainstay of liquidity in recent years, and BUSD is the third largest by market capitalization and third most traded token,” said Yuya Hasegawa, analyst at crypto exchange Bitbank. “Needless to say, the threat to BUSD has the potential to change the stablecoin landscape and users’ trading activity.”

Crypto markets look set to sour on the latest signs of regulatory storm clouds gathering. Digital assets were lower across the board on Monday, with

Bitcoin

down 1% in the last day to $21,650, after changing hands over $22,500 late last week. Binance Coin, a token issued by Binance and used on the exchange, as well as the fourth largest crypto, fell 5%.

“I think these stablecoin rules have the potential to be a pretty big deal for the space structurally and could have a real impact on the market,” Hal Press, head of digital hedge fund North Rock Digital, wrote on Twitter.

For Binance, scrutiny of BUSD and its partner Paxos marks just the latest pressure on the exchange’s links to the US financial system.

Binance said in January that its US banking partner, Signature Bank (ticker: SBNY), would no longer support individual crypto customers buying or selling amounts less than $100,000. Last week, Binance said it would suspend all wire transfers in US dollars linked to the stock exchange.

Write to Jack Denton at [email protected]