Binance stablecoin BUSD under regulatory scrutiny as issuer Paxos told to stop minting under security laws

The regulatory clampdown against the ailing crypto sector was turned up a notch in the US on Monday, adding a major stablecoin issuer and the world’s largest exchange Binance to the roster of digital-asset companies under fresh scrutiny.

The New York State Department of Financial Services said it had directed Paxos Trust Co to stop issuing new tokens of crypto’s third largest stablecoin, a Binance-branded coin known as BUSD that has roughly US$16 billion in circulation. The move targeted two core pillars of crypto – its most-traded type of tokens and the biggest exchange offering them – in one fell swoop, showing how watchdogs are keen to get tough on the sector after years of relative inaction.

Last year’s market declines and high-profile blow-ups, including alleged fraud at bankrupt exchange FTX and crypto failures that burned big players and everyday investors alike, have added urgency to the task of oversight. The US Securities and Exchange Commission has also taken a stronger approach to crypto enforcement lately, seeking to challenge the crypto sector’s perception that its assets do not qualify as securities that must be registered. It settled with crypto exchange Kraken over its offering of so-called staking services last week, and has previously said that some stablecoins could be considered as securities.

Stablecoins like Paxos’s BUSD, Tether’s USDT and Circle’s USDC are crypto tokens that are intended to hold a set value, for example US$1. They come in a variety of forms and some are underpinned by reserves like cash and bonds. Investors often park funds in stablecoins as they move between crypto trades, with around US$136 billion currently in circulation.

As the third-largest stablecoin, BUSD has acted as a cog both in billionaire Changpeng “CZ” Zhao’s Binance ecosystem and the wider crypto sector, and Binance has moved to prioritise its use over other stablecoins in recent months on its exchange. Binance, which does not disclose where it is headquartered, has faced regulatory scrutiny and investigations in recent years across various jurisdictions, including the US. Like many of its rivals, the exchange has had to grapple with a loss of investor confidence over recent months, made worse by the sudden collapse of FTX.

“The Paxos story is certainly not good news for Binance as BUSD is an important conduit” for maintaining liquidity on its exchange, helping support the vast amount of trades on the platform, said Bradley Duke, co-chief executive at crypto exchange-traded products provider ETC Group. “The bigger question is, what is the SEC’s endgame here following last week’s crackdown on Kraken?”

The New York regulator said its decision was the result of “several unresolved issues related to Paxos’s oversight of its relationship with Binance”, adding that the department does not regulate a spin off token issued by Binance itself, known as Binance-peg BUSD, which relies on Paxos’s BUSD as collateral. Paxos said that it will end its relationship with Binance and cease issuance of BUSD from February 21, though it will continue to support reserves for BUSD – a store of approximately US$16.1 billion in cash and short-dated US Treasuries – and redeem tokens for customers for at least the next 12 months.

Paxos and Binance did not immediately respond to a request from Bloomberg for comment on the regulator’s statement.