New York regulator orders Binance stablecoin backer to stop issuing token

Paxos says it would stop issuing new Binance USD, which is backed by traditional cash and US Treasury bills

LONDON:

New York's chief financial regulator said on Monday it has ordered the firm behind Binance's stablecoin to stop issuing the token after finding it could not do so in a "safe" manner, in a blow to the world's biggest crypto exchange.

The New York Department of Financial Services (NYDFS) said in consumer alert it has ordered Paxos Trust Company to stop minting Binance USD, citing "unresolved issues" in Paxos' oversight of its relationship with Binance.

An NYDFS spokesperson later told Reuters via email that Paxos violated its obligations for "tailored, periodic risk assessments" and due diligence checks on Binance and Binance USD customers needed to stop "bad actors from using the platform."

Paxos said in a statement that it would stop issuing new Binance USD, which is backed by traditional cash and US Treasury bills, from Feb. 21, but would continue to support and redeem the tokens until at least February 2024.

Stablecoins, digital tokens typically backed by traditional assets that are designed to hold a steady value, have emerged as one of the key cogs in the crypto economy. They are used for trading between volatile tokens like bitcoin and, in some emerging economies, as a means to protect savings against inflation.

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The NYDFS move represents a setback to Binance's efforts to gain market share from larger stablecoins rivals such as Tether and USD Coin, analysts said. The loss the New York-regulated status offered by Paxos may also hurt Binance's appeal to larger investors seeking, they said.

"It is a big setback for Binance," said Ivan Kachkovski, FX and crypto strategist at UBS. "It remains to be seen whether (and when) Binance will be able to find a US-based partner for its stablecoin. The latter appears crucial in the wake of US regulation on stablecoins that is coming sooner rather than later."

Race for the 'dollar of crypto'

Binance USD is the third-biggest stablecoin behind market leader Tether and USD Coin, with about $16 billion in circulation, and is the seventh-biggest cryptocurrency, according to market tracker CoinGecko.

The token "in theory had the potential to replace both as a de jure dollar of crypto," said Joseph Edwards, investment advisor at crypto firm Enigma Securities.

"What's being seen on the desks today is a significant flight from BUSD to USDT (Tether)," he said.

8/8 Given the ongoing regulatory uncertainty in certain markets, we will be reviewing other projects in those jurisdictions to ensure our users are insulated from any undue harm.

— CZ 🔶 Binance (@cz_binance) February 13, 2023

Binance CEO Changpeng Zhao wrote in a series of tweets on Monday that the regulator's decision meant that "BUSD market cap will only decrease over time," adding that Paxos has assured Binance the funds were fully covered by Paxos' bank reserves.

Binance would "continue to support BUSD for the foreseeable future," Zhao said, predicting that users would shift to "other stablecoins over time."

The NYDFS move, first reported by the Wall Street Journal, comes amid a wider crackdown on cryptocurrencies and Binance by US regulators. The Justice Department is investigating Binance for suspected money laundering and sanctions violations, Reuters has previously reported. Binance has previously said it regularly works with regulatory agencies to address questions they may have.

The WSJ, citing unnamed sources, reported on Sunday that the US Securities and Exchange Commission has told Paxos it plans to sue the company, alleging that Binance USD is an unregistered security.

The SEC did not immediately respond to a request for comment.