Binance and Paxos caught up in crypto regulatory crackdown
Paxos, the largest issuer of regulated stablecoins, has announced that it will end its relationship with Binance, and stop issuing new Binance USD (BUSD) stablecoin tokens effective February 21, following regulatory scrutiny by the New York Department of Financial Services (NYDFS).
Important takeaways
- Paxos ends Binance relationship for BUSD stablecoin following NY regulator action.
- Paxos and Binance have assured investors that their funds are safe and redeemable.
- The SEC reportedly plans to sue Paxos for violating investor protection laws.
- NY action against Paxos follows last week’s SEC settlement with the Kraken exchange.
NYDFS forces Paxos to stop BUSD issuance
The NYDFS ordered Paxos to stop minting BUSD tokens due to “several unresolved issues related to Paxos’ oversight of its relationship with Binance through Paxos-issued BUSD.”
This is not the first time that Binance, the world’s largest crypto exchange, has found itself in hot water with US regulators. Binance has been under investigation since 2018 for compliance with US anti-money laundering rules, according to Reuters.
According to Coinmarketcap, BUSD is the seventh largest stablecoin by market capitalization, and its value is pegged to the US dollar. In a blog post dated November 2022, Binance said it allows Paxos to create new BUSD on the Ethereum blockchain and provides it with licensing support. The post also said the BUSD token was “approved by the New York Department of Financial Services” with reserves held only in Federal Deposit Insurance Corporation (FDIC)-approved accounts.
“All BUSD tokens issued by Paxos Trust have and will always be backed 1:1 with US dollar-denominated reserves, fully segregated and held in external bankruptcy accounts,” Paxos reassured investors in a statement.
Binance CEO Changpeng Zhao also took to Twitter on Monday to reassure investors that funds were safe in BUSD. He also confirmed that Paxos will continue to manage BUSD stablecoin redemptions.
NYDFS also said it is “closely monitoring Paxos to verify that the company can facilitate redemptions in an orderly manner subject to enhanced, risk-based compliance protocols.”
Paxos offered BUSD alongside its USDP stablecoin and PAXG gold-backed crypto token. Paxos has previously received over $500 million in funding from leading investors, including PayPal Ventures and lists former FDIC Chairman Sheila Bair on its board.
More regulatory pain ahead?
Regulators are tightening their focus on cryptocurrency firms, and it looks like they’re just getting started. The action against Paxos followed shortly after a report by the Wall Street Journal that the Securities and Exchange Commission (SEC) planned to launch a lawsuit against the crypto platform for violating investor protection laws. Just last week, the San Francisco-based Kraken exchange settled with the SEC by paying a $30 million fine and halting its US staking-as-a-service business.
The pressure on the Paxos platform to stop the issuance of the BUSD stablecoin is another blow to the Binance exchange. Binance CEO Zhao said that if BUSD was ruled to be a security, “it will have a profound impact on how the crypto industry will develop in the jurisdictions where it is governed as such.”
