New York regulators have ordered the cryptocurrency firm Paxos to stop issuing Binance USD (BUSD) — the third largest stablecoin by market cap and pegged to the US dollar — over concerns that it can’t “safely” issue the token, as reported earlier by Reuters and The Wall Street Journal.
This comes as Paxos faces a potential lawsuit from the Securities and Exchange Commission (SEC) over the BUSD token. Sources close to the situation tell The Wall Street Journal that the agency is planning to sue the company “for violating investor protection laws.”
Paxos later confirmed that it received a Wells Notice from the agency — or a letter that the regulator uses to inform a company or individual of potential violations and enforcement actions — and says it “categorically disagrees” with the SEC “because BUSD is not a security under the federal securities laws.”
In a notice posted to the New York Department of Financial Services (NYDFS) website on Monday, the agency says the order is a result of “several unresolved issues related to Paxos’ oversight of its relationship with Binance through Paxos-issued BUSD.”
Following the collapse of FTX and the arrest of its founder, Sam Bankman-Fried, the federal government is tightening its grip on the crypto industry. The SEC hit the crypto exchange Kraken with a $360,000 fine last year for allegedly violating US sanctions against Iran and later fined the exchange an additional $30 million for selling unregistered securities.
Paxos partnered with Binance in 2019 to launch the token, which received approval from the NYDFS at the time. However, as Binance CEO Changpeng “CZ” Zhao reiterates on Twitter, the exchange licensed the Binance brand to Paxos, and BUSD is “wholly owned and managed by Paxos.”
Paxos says that it’s complying with the NYDFS order in a press release, noting that while it will stop issuing new BUSD tokens starting on February 21st, the stablecoin will remain “fully supported” and “redeemable” by Paxos through “at least” February 2024. Meanwhile, new and existing Paxos customers can convert their BUSD tokens to Pax Dollar (USDP), another dollar-backed stablecoin issued by Paxos. Binance will also support BUSD for “the foreseeable future,” according to CZ, although he expects its market cap to “decrease over time.”
According to data Bloomberg obtained from CryptoQuant and Coinglass, stablecoin withdrawals on Binance grew to around $183.8 million after 8AM ET on Monday, while withdrawals across the entire exchange ballooned to $462 million within the past 24 hours. Additionally, an analysis from DefiLlama, viewed by Bloomberg, indicates that BUSD makes up around 19 percent of Binance’s reserves, or the assets crypto exchanges use to cover withdrawals and other liabilities.
Last month, Coinbase also had to pay $50 million over claims it violated anti-money laundering laws, while the crypto lender Nexo settled with the SEC for $45 million over claims it violated securities law. The Federal Trade Commission is also cracking down on crypto by investigating various firms for possible misconduct.
Update February 13th, 4:24PM ET: Updated to add Paxos’ confirmation that it received a Wells Notice from the SEC.