Circle Allegedly Warned NYDFS That Binance Wasn’t Properly Backing Tokens
According to a Monday report, Circle, the issuer of the USDC stablecoin, provided a warning to the New York State Department of Financial Services (NYDFS) that Binance was not properly backing the tokens it was issuing. The ensuing investigation also allegedly found that Paxos wasn’t doing its due diligence with regard to its Binance-branded stablecoin BUSD.
Circle Filed a Complaint With NYDFS Over Binance-Issued Tokens
Reportedly, the stablecoin issuer Circle filed a complaint with the New York State Department of Financial Services sometime during the Autumn of 2022 alleging that Binance wasn’t properly backing the tokens it was issuing. For example, Bloomberg’s report states that the world’s largest cryptocurrency exchange at one point allegedly had only $100 million worth of assets backing $1.7 billion of Binance-peg USDC.
While the complaint was primarily aimed at Binance’s collateralization of its tokens, Paxos, a firm that shares the NY regulator with Circle and serves as the issuer of BUSD, also found itself under investigation. An earlier report noted that NYDFS found that Paxos failed to conduct its due diligence and regularly conduct risk assessment with regard to the Binance-branded stablecoin. As a result, the firm was ordered to stop minting the token.
Last week, on February 10th, Binance admitted that BUSD wasn’t always properly collateralized but primarily due to a lower frequency of balance updates. At the time, the world’s largest cryptocurrency exchange also stated that it had already detected the issue and implemented measures to resolve it. It is currently unknown if NYDFS is directly investigating the world’s largest exchange.
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Binance’s CEO Responds to NY Regulator’s Order to Paxos
Quickly after it was revealed that NYDFS ordered Paxos to stop minting BUSD, Binance’s CEO Changpeng Zhao took to Twitter to publish his statement on the situation. According to the exchange’s CEO, Binance will, much like Paxos, continue supporting the stablecoin “for the foreseeable future”. He also added that despite the regulatory actions all user funds are safe.
CZ also touched upon the allegation that the Securities and Exchange Commission is preparing to sue Paxos as it considers BUSD to constitute an unregistered securities offering. Binance’s CEO stated that while he has no information on the case as it is not directly related to his company, he believes that if BUSD is ruled to be a security, it could have a profound impact on the future development of digital assets.
Recent aggressive actions taken by regulators in the US significantly shook the cryptocurrency market and disrupted several large projects. Last week, NYDFS’s investigation of Paxos proved significant enough for PayPal to pause its stablecoin project indefinitely.
Editorial note (February 14th, 1:44 PM EST): The headline was updated for clarity. The article was updated to provide additional clarity regarding the investigation of Paxos and Binance, and the order to cease issuing BUSD given to Paxos by NYDFS.
Do you think US regulators are preparing an enforcement action against Binance over its alleged failure to properly collateralize its tokens? Let us know in the comments below.