BUSD: US regulator orders Paxos to stop new issuance of Binance-branded stablecoin

Hong Kong (CNN) New York’s top financial regulator has ordered a crypto company to stop minting a major stablecoin, widening the tide against the troubled digital asset sector.

Paxos, a blockchain company, announced on Monday that it had been instructed by the New York State Department of Financial Services (NYDFS) to stop issuing BUSD, a Binance-branded stablecoin pegged to the US dollar.

The firm said in a statement that it would stop issuing the token on February 21. The already circulating “have and always will be” backed one-to-one with US dollar reserves, it added.

Paxos has told clients that they will be able to redeem BUSD until February 2024, with options to redeem funds in US dollars or to convert their tokens into Pax Dollar, another stablecoin issued by the company.

Paxos also said it would “end its relationship” with Binance, the world’s largest crypto exchange. It did not provide details on why the regulator had ordered it to stop issuing BUSD.

In a statement, the NYDFS told CNN that the order was “a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance.”

“The department is closely monitoring Paxos to verify that the company can facilitate redemptions in an orderly manner subject to enhanced, risk-based compliance protocols,” it said.

BUSD is one of the world’s most popular stablecoins, with a circulation of 15.8 billion tokens, according to CoinMarketCap.

Stablecoins are digital currencies designed to remain stable. They are usually linked to real assets such as gold or the US dollar.

In a statement to CNN, Binance emphasized that although the name was on the coin, “BUSD is a stable coin that is fully owned and managed by Paxos.”

“Binance licenses its brand to Paxos for use with BUSD, which is wholly owned by Paxos and regulated” by New York authorities, the exchange said.

The investors rattled

The BUSD news has unsettled investors. Binance suffered one of its worst days ever in terms of withdrawals on Monday, with 873 million dollars in net outflow, according to the data supplier Nansen.

“Obviously there are a number of traders and investors moving to take their money out of the exchange,” Andrew Thurman, Nansen’s chief content officer, told CNN.

He noted that Binance had seen worse days. In December, a deluge of bad press unnerved investors, triggering outflows of as much as $3 billion.

This time, “investors are still trying to digest the news,” Thurman added.

“We are seeing some indecision from the market trying to decide if this is a case of agencies going after a bad instance of a stablecoin, or trying to shut down stablecoins altogether.”

In its statement, Binance warned that The move to stop minting BUSD would harm users and “only reduce” the token’s market value over time.

“Stablecoins are a critical safety net for investors seeking refuge from volatile markets, and limiting their access would directly harm millions of people worldwide,” the firm said.

Martin Lee, a data journalist for Nansen, told CNN that Binance had few options to counter the ban.

“Over time, supply will decrease as redemptions occur,” he said.

But “in terms of confidence in the exchange as a whole,” Binance is likely to retain users as long as customer deposits continue to be protected and users can still convert BUSD to other stablecoins, Lee added.

Regulatory squeeze

As of last year, the digital economy asset sector has been going through a so-called “crypto winter”, triggered by the collapse of TerraUSD, an algorithmic stable coin, in May.

Then FTX, one of the world’s largest crypto exchange at the time, went bankrupt in November, which compounded crisis in the industry.

As a result, digital asset companies face tighter regulatory scrutiny around the world.

Last week, the US Securities and Exchange Commission said monitoring cryptoassets was a key priority for 2023.

The SEC also reached a $30 million settlement with cryptocurrency platform Kraken last Thursday. Agreement will force the company to wind up a program that offers investment returns to US users who have pledged their digital assets to the company.

This practice, known as “staking,” reflected an unregistered offer and sale of securities, the SEC argued in a complaint.

Hong Kong has also announced plans for new rules. The city, which hopes to become a virtual asset center, last month announced plans to adopt new rules for stablecoins, including licensing requirements for businesses.

According to crypto advocates, the growing global clampdown could undermine the digital asset ecosystem.

— CNN’s Brian Fung contributed to this report.