As the Securities and Exchange Commission's enforcement mechanism moves forward in the cryptocurrency space, it has received help from the New York Department of Financial Services (DFS), a prominent state regulator at the time. In a statement posted on its website, DFS ordered New York-based trust firm Paxos to immediately halt its $15.8 billion Binance USD (BUSD) token transfer offer.
Meanwhile, the SEC plans to sue Paxos for issuing BUSD as an unregistered security, according to a Wall Street Journal report. The DFS order said the actions "result from a number of unresolved issues with Paxos related to the handling of relationships with Binance regarding BUSD issued by Paxos." In a series of comments to Reuters , Paxos attempted to explain that Paxos "violated the due diligence obligations of Binance and Paxos to the BUSD client to provide timely personalized risk assessments and prevent malicious use of the platform."
The language is deliberately vague, and a source in the crypto-forensics industry, which consists of companies designed to detect the illicit use and trade of digital assets, suggested the language reflected threats of money laundering and/or fraud. Customer problems. DFS declined further comment to Forbes.
DFS-regulated companies such as Paxos must obtain the regulator's approval to begin trading their digital assets, such as issuing a new stablecoin mined on the Ethereum blockchain, such as BUSD. A source familiar with Paxos said Ethereum was chosen because "Ethereum is the most secure blockchain you know and the New York regulator is really comfortable." However, Binance, the world's largest cryptocurrency, wants its assets to be available on other blockchains, including its own Binance Smart Chain platform.
For Binance, the solution was to create a version of BUSD called Binance-peg BUSD. On the surface, the process was simple. Binance buys BUSD, puts it in a secure Ethereum wallet, then issues a Binance BUSD pin at a 1:1 ratio. According to Binance, about $5.3 billion of Binance-pegged BUSD has been issued across the various networks, or one-third of the total volume. Today, BUSD accounts for roughly 35% of the total trading volume on Binance, according to data provider Caico.
The process seems simple, but it happened. Binance's BUSD peg has traded below $1 billion multiple times, according to a recent Bloomberg report.
Liquidity has never been more important for cryptocurrencies in an industry that has experienced the collapse of notable companies such as Genesis Trading, BlockFi, Voyager, Celsius and FTX, as well as the main cryptocurrency, the US dollar. And Binance was abandoned or hacked.
According to a source familiar with Paxos, the company was unaware that Binance planned to manually transfer the token to other blockchains. DFS held several meetings with the company in January when the disclosure was made. “I can say with 100% certainty that they will fully appreciate the difference between BUSD and b-pen BUSD,” the source said.
For Paxos, the company saw a gap between BUSD and Ethereum, which it is responsible for, and options on other blockchains that were being sought outside of the purchase. The US Mint cannot be held responsible for counterfeit dollars. "They want to understand where they can manage risk and where they can't," the source said. "Once you transfer something with [Ethereum], there's not much you can do."
While the fate of BUSD seems sealed, big questions remain for the stablecoin industry. After all, it is nearly impossible for a stablecoin issuer to ban the tokenization of any digital asset and create a market or public relations risk.
For example, with a volume of $41.19 billion USD Coin (USDC) is the second largest digital dollar in the world after Tether (USDT) which has a volume of $66.44 billion. Unlike Paxos, which only issues BUSD on Ethereum, Circle offers USDC on eight blockchains, including Ethereum, Solana, and Avalanche. One of the unsupported blockchains is the Binance Smart Chain, so Binance has created a Binance peg to USDC with a market cap of $779 million. Club administrators are worried about such a move. On the one hand, this increased the demand for USDC. However, this creates an opportunity for negligence or misconduct.
Do these developments mean we're in for a similar fate to the DFS-run USDC?
Circle may try to argue that USDC is qualitatively different from BUSD because it is the sole issuer of the token, while Paxos operates a White Label service, creating a sense of distance between the organization and [Binance's] customers. transmission However, there is no guarantee that DFS will appreciate the difference. In addition, the SEC report's investigation into Paxos and BUSD explains that stablecoins can easily be considered securities, even if they are not intended as investment vehicles.