Stablecoin issuer Paxos said early Monday it will cease creating new units for the $16 billion Binance Stablecoin (BUSD) at the direction of its state regulator, the New York Department of Financial Services (NYDFS).
As of February 21, Paxos will cease minting BUSD tokens.
In an investor alert, the NYDFS cited “several unresolved issues related to Paxos’ oversight of its relationship with Binance in regard to Paxos-issued BUSD” as an explanation for the decision.
Paxos will continue managing redemptions for the product and has assured that all funds are safe and fully covered by reserves in their banks. The BUSD token is a digital asset pegged one for one to the U.S. dollar; its price isn’t supposed to fluctuate from this peg.
“Paxos has always prioritized the safety of its customers’ assets. That was true at our founding and remains true today. BUSD will remain fully supported by Paxos and redeemable to onboarded customers through at least February 2024,” Paxos said in a statement.
“New and existing Paxos customers will be able to redeem their funds in US dollars or convert their BUSD tokens to Pax Dollar (USDP), a regulated US dollar-backed stablecoin also issued by Paxos Trust,” the company added.
Though carrying the Binance name, the market’s third-largest stablecoin is wholly owned and managed by Paxos. The NYDFS previously authorized Paxos to issue BUSD on the Ethereum blockchain. However, the Department has not authorized other related tokens pegged to the price of BUSD, the regulator said.
A Paxos spokesperson went on to tell, the NYDFS order “does not impact” the company’s USDP or Pax Gold (PAXG) stablecoins.
A spokesperson for Binance, the largest crypto exchange, said given Paxos will cease creating new units for the stablecoin, “BUSD market cap will only decrease over time.” Since the beginning of November, BUSD’s market cap has fallen by about $5 billion.
“Given the ongoing regulatory uncertainty in certain markets, we will be reviewing other projects in those jurisdictions to ensure our users are insulated from further undue harm,” the Binance spokesperson added.
In the wake of the FTX collapse, U.S. regulators are getting tough on crypto firms.
This latest development comes less than 24 hours after the Wall Street Journal reported Sunday night, citing an unnamed source, that Paxos has received a Wells notice from the U.S. Securities and Exchange Commission (SEC). A Wells notice is a formal letter sent by the SEC to inform a recipient it plans to bring an enforcement action.
In a statement shared, Paxos said it “categorically disagrees with the SEC” on whether the BUSD stablecoin is a security under the federal securities laws.
“We will engage with the SEC staff on this issue and are prepared to vigorously litigate if necessary,” the company said.
At the end of last week, the SEC charged U.S. based crypto exchange Kraken with offering unregistered securities through its crypto staking program. In the days since, Coinbase has said it would defend against any similar charges levied against its own staking program.
The SEC’s action against Kraken marked the fourth enforcement action against a crypto firm by the agency already this year.
The NYDFS is also investigating Gemini, the cryptocurrency exchange founded by Tyler and Cameron Winklevoss. The state’s Attorney General charged former Celsius Network CEO Alex Mashinsky with allegedly defrauding investors.
Last week, Binance announced it would temporarily suspend U.S. dollar bank transfers.
In response to the Paxos order, Binance’s founder and CEO Changpeng Zhao said over Twitter, the company is exploring options to find another issuer of “non-USD based stablecoins.”
Stablecoins make up the majority of transaction volume across the crypto market, currently accounting for 97.5% of all crypto transactions, according to Coinmarketcap. Their success comes down to utility in addition to investor trust in how issuers can manage reserve assets.
BUSD is the third-largest stablecoin by circulating market capitalization. In the past 24 hours, it has fallen below its crucial $1 price peg to as low as $0.998 per coin. According to a self-reported reserves attestation from February 10, Paxos holds all of the stablecoin’s assets in short duration U.S. Treasuries.
Circle, issuer of the second largest stablecoin, USDC, contends its own coin is different.
“Facts and circumstances in any type of regulatory action like this are all different, as are the structural and regulatory considerations with each of the cryptocurrencies that are in circulation around the world,” Dante Disparte, Circle Chief Strategy Officer said in a shared statement.
At the beginning of May 2022, $20 billion algorithmic stablecoin Terra USD fell below its $1 price peg and quickly collapsed.