Circle has reportedly complained to the regulator re Binance stablecoin – Ledger Insights

Bloomberg reported that Circle, the issuer of the USDC stablecoin, filed a complaint with the regulator New York State Department of Financial Services (NYDFS) that the Binance USD (BUSD) coin was not fully supported. Yesterday it became known that Paxos would stop issuing new BUSD following instructions from the NYDFS.

The Circle complaint was likely not related to the Paxos-issued coin on Ethereum, but instead the Binance-issued pegged BUSD stablecoin on other chains.

The saga raises questions about the importance of stablecoin competition. In addition, the SEC is targeting BUSD, saying Paxos issued a security. We explore why the SEC may perceive Paxos as less likely to fight.

The problem: the pegged BUSD stablecoin

It is likely that the Circle NYDFS complaint did not refer to the Ethereum stablecoin for which Paxos is responsible. Binance issued pegged stablecoins using the same BUSD token on other blockchains, which were meant to be backed one-to-one by Ethereum BUSD issued by Paxos. However, records show that they were not fully supported at any time in the past. Binance claimed that it was a processing issue that resulted in time differences that have been corrected.

However, Paxos was only authorized by the NYDFS to issue BUSD on the Ethereum chain. There is a strong argument that Paxos should have followed the Binance-linked issuance of BUSD on other chains. But by doing so, it will likely be legally liable. We recently explored the problematic branding issue where pointed or bridged tokens have the same branding as tokens from the primary issuer. This also applies to BUSD and USDC, but to a lesser extent.

In a statement, the NYDFS said there were “several unresolved issues related to Paxos’ oversight of its relationship with Binance in relation to Paxos-issued BUSD.” Bloomberg cited additional NYDFS comments, including “Paxos failed to address key deficiencies, requiring further Department action.”

Reuters quotes a NYDFS spokesperson as saying that Paxos “breached its commitment to perform tailored, periodic risk assessments and due diligence updates on Binance and Paxos-issued BUSD clients to prevent bad actors from using the platform.”

As we noted yesterday, Binance controls nearly 84% of the total BUSD issuance on the Ethereum chain.

Paxos is Circle’s most credible competitor

In addition, Paxos has received a Wells notice from the SEC alleging that the BUSD stablecoin is a security. In many ways this is a more serious problem. The Wells alert only relates to BUSD, not Paxo’s dollar USDP, its own brand stablecoin. Equally important, Paxos is a partner of PayPal, which planned a stablecoin that has now been put on hold.

For stablecoins, it is crucial to encourage competition to reduce the risk of systemically large digital currencies. The greater the number of regulated and competitive stablecoins, the better. In terms of stablecoin issuers that could go mainstream, Paxos is currently the most credible competitor to Circle.

The biggest stablecoin player Tether is offshore and not trusted by regular institutions. Therefore, Tether is more likely to remain crypto-specific. Currently the competition is Circle and Paxos.

If BUSD is a security, it is even more likely that USDC is a security. After all, USDC is essentially a tokenized money market fund, with BlackRock managing the funds.

Before BlackRock began managing Circle’s reserve assets, with BNY Mellon in custody, Paxos set the standard for quality. Paxos set the standard to hold all assets in government bonds or bank balances instead of certificates. It is Paxos that sets an example for transparency and quickly published certificates. Competition is good.

Paxos has responded to the Wells alert:

“Paxos categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws. This SEC Wells Notice applies only to BUSD. To be clear, there are unequivocally no other allegations against Paxos. Paxos has always prioritized the safety of its clients’ assets. BUSD issued by Paxos are always backed 1:1 with US dollar denominated reserves, fully segregated and held in external bankruptcy accounts. e will engage with the SEC staff on this issue and is prepared to take vigorous legal action if necessary .”

Why Paxos can be seen as a softer touch

Given that NYDFS is forcing BUSD to liquidate, why is the SEC targeting it? The fact that Binance controls wallets that hold nearly 84% of all Paxos-issued BUSD could make it an attractive target. But winding it down should be enough.

If the SEC wanted to pick a high-profile target to set a precedent that stablecoins are securities, it has only three choices:

one. Market leader Tether which is mostly offshore, so difficult to reach

b. Circle, the issuer of the second largest coin USDC has deep pockets and the entire business is stablecoins. So it has no choice but to fight

c. Paxos has moderately deep pockets, but is a diversified company.

Stablecoins are only a plank of the Paxos business, albeit an important one. One of the biggest businesses is crypto exchange itBit and crypto broker for companies like PayPal. It is working with major institutions such as Schwab, Citadel Securities and Fidelity on a new institutional exchange EDXM.

Long-term Paxos aims to be a major player in securities settlement. For a while, it piloted a blockchain settlement service with major institutions such as Bank of America, Credit Suisse, Instinet, Societe Generale and ABN Amro. However, the SEC’s no-action letter expired in late 2021, and it needs the SEC’s green light to move forward.

So from the SEC’s perspective, if it wanted to target one of the stablecoin issuers, then Paxos seems the softest touch.