According to a Binance spokesperson, the New York Department of Financial Services (NYDFS) has ordered Paxos to stop issuing the stablecoin BUSD.
Despite playing an essential role in the Binance ecosystem, BUSD is issued by the company Paxos. On February 13, Paxos announced the termination of its relationship with Binance and stopped issuing new BUSD coins as of February 21, at the request of the New York Department of Financial Services (NYDFS).
In a warning to users on February 13, the NYDFS said it had forced Paxos to stop minting BUSD “due to several unresolved issues regarding Paxos oversight of their relationship with Binance.” Reuters quoted a spokesperson for the agency that Paxos violated its obligations to conduct risk assessments periodically, as well as due diligence of Binance customers to prevent bad guys from using the platform.
BUSD is a stablecoin branded Binance, with a 1:1 conversion value to USD and used for trading on the world’s largest cryptocurrency exchange. The two companies collaborated to launch this coin in 2019. According to the Binance website, there are currently about 6.2 million people holding BUSD. The total value of this coin on the market is about 16 billion USD, making it the seventh largest cryptocurrency in the world and the third largest stablecoin by size, after USDT and USDC.
Similar to other stablecoins, the value of BUSD has pegged to the USD price thanks to the collateral assets held by Paxos. In yesterday’s announcement, Paxos confirmed that its reserve instruments still fully support BUSD at 1:1 conversion, and confirmed that it will buy back these coins at least until February 2024.
On his personal Twitter, Binance founder Changpeng Zhao said that BUSD is “fully owned and managed” by Paxos. The cease-and-desist “only causes the market capitalization of this cryptocurrency to decrease over time”.
Nearly $3 billion has been withdrawn after Paxos was ordered to stop issuing BUSD
Data from blockchain data firm Nansen shows that users have withdrawn about $2.8 billion in digital assets from crypto exchange Binance in the past 24 hours alone. Meanwhile, the amount of money poured in simultaneously was nearly 2 billion USD. Thus, Binance had a net withdrawal of about 830 million USD in 24 hours. This is also the largest net withdrawal since November 2022 when the FTX exchange went bankrupt.
Reports are also now emerging that BUSD’s $15 billion stablecoin market cap could now grow, with Bloomberg reporting earlier today that Circle has told the New York watchdog that stablecoins of Binance are not fully supported. USDC and USDT have a combined market cap of $109 billion, more than seven times the $15 billion market cap of BUSD.
In a Twitter thread published on February 13, CZ admitted that he might have been duped. “We foresee users moving to other stablecoins over time,” admitted CZ. “And we will tailor the product accordingly. e.g. avoid using BUSD as the main trading pair etc.”
However, CZ said that he hopes US regulators will not issue notices declaring BUSD security, adding that “due to ongoing regulatory uncertainty in certain markets, we will review other projects in those jurisdictions to ensure our users are insulated from anything outrageous harm.”
Is BUSD being issued a big obstacle for Binance?
According to analysts, although not directly owned by Binance, BUSD is still one of the exchange’s important tools in capturing market share from other stablecoin competitors as well as attracting investors.
“This will be a big hit for Binance and it remains to be seen when Binance can find a US counterpart for its stablecoin,” said Ivan Kachkovski, crypto and forex analyst at UBS. Experts also forecast that there will be a strong shift from BUSD to other stablecoins, especially USDT shortly.
According to the WSJ, stablecoins have been a lucrative business in recent years. They make it easy for players to trade on cryptocurrency exchanges instead of having to transact through a bank. But besides that, issuers like Paxos also profit from bringing short-term investors’ deposits to earn interest.