Paxos will Cease Minting BUSD Tokens After Guidance from NYDFS

As regulators carry out a crackdown on crypto exchanges and clamp down on the ailing digital assets sector, the issuer of crypto's third largest stablecoin is stopping the production of new tokens for its Binance-branded coin.

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The New York Department of Financial Services, which regulates the issuance of all stablecoins, announced on Monday that Paxos Trust Co. will end its partnership and cease issuing the branded stablecoin BUSD on Feb. 21, as directed by the department. For the next 12 months, Paxos plans to continue supporting the BUSD reserve, as well as redeeming tokens for onboarded customers for a period of at least 12 months.

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The number of customer withdrawals of stablecoins from Binance has spiked following an initial announcement by the exchange, with roughly $183.8 million worth of stablecoins withdrawn from the platform after 8 am London time, according to data from CryptoQuant. A Coinglass analysis of the exchange's reserves revealed that customers drained $462 million worth of crypto assets from the exchange in the last 24 hours, according to an analysis of the platform reserves that was conducted by the company. Across all exchanges tracked by the data provider, this was the highest amount of outflows ever seen.

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In response to the recent rout in the prices of digital assets, which led to a series of high-profile company failures, financial watchdogs have launched the latest crackdown on crypto products. Crypto exchange Kraken announced last week that it would no longer offer so-called staking services in the US and would pay $30 million to settle claims that the service violated the rules and regulations of the US Securities and Exchange Commission.

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It has also been reported that Paxos is also at risk of being sued by the Securities and Exchange Commission (SEC) for alleged violations of shareholder protection laws, according to a Dow Jones story that cited unidentified sources familiar with the situation. The SEC has reportedly sent Paxos a so-called Wells notice alleging that BUSD is unregistered security, according to the people who spoke with the SEC.

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A stablecoin is a cryptocurrency based on blockchain technology that holds a set value, and as an example $1 is one of the stablecoins. As you might expect, they can come in a variety of forms, and some of them are supported by reserves such as cash and bonds. There is around $136 billion worth of stablecoins in circulation at the moment, making stablecoins the most traded cryptocurrencies in the world, as investors park their funds while they attempt to move between crypto trades.

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Earlier this month, Bradley Duke, co-chief executive officer of ETC Group, a crypto exchange-traded products provider, stated that since the failure of trading platform FTX earlier this month, the SEC has adopted a more bellicose stance towards crypto exchanges and their products.

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“As Paxos is an important conduit for on-exchange liquidity on Binance's exchange, Binance is most certainly not happy about the Paxos story. In the wake of last week's crackdown on Kraken, the bigger question here is what is the SEC's endgame here?” Duke added.

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Binance Pressure

The third largest cryptocurrency by market value, BUSD, is valued at $16 billion and is a vital part of both billionaire Changpeng "CZ" Zhao's Binance ecosystem and the wider crypto market as a whole. Binance, a cryptocurrency exchange that does not disclose its location of headquarters, has been the target of regulatory scrutiny in recent years across various jurisdictions, including the United States. Recently, the exchange, along with many of its rivals, has been faced with a loss of investor confidence over the past few months, exacerbated by the sudden collapse of the FTX exchange.

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As a result, Binance Coin, a native token of the Binance exchange, dropped as much as 8.9% on Monday, reaching its lowest point since mid-January, and has been declining ever since. Crypto markets as a whole dipped, with Bitcoin, Ether, as well as an assortment of smaller tokens all dropping.

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It has been estimated that 19% of Binance's reserves are held in BUSD, and 25.4% in BNB, according to an analysis of the platform's data by DeFiLlama.

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The Binance platform began transitioning traders toward using the BUSD stablecoin last year by automatically converting deposits of most of the top stablecoins into the branded token, thereby pushing up the share of BUSD on the platform. There was no immediate response from a Binance spokesperson when asked whether or not this policy may be revised following Paxos's announcement.

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The CEO of Binance, Changpeng Zhao, announced in a tweet that Binance will move away from using BUSD as the main trading pair on its exchange as of now.

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It is important to note that Paxos is regulated by the NYDFS and that reserves for BUSD are held in cash as well as Treasury bills. Unlike other stablecoins, Pax Dollar, which has a market value of $899 million, is issued by the company and is its own stablecoin.

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Regulatory Crackdown

Since the now-bankrupt crypto exchange FTX imploded with an $8 billion financial hole last November, United States regulators have increased their scrutiny of the cryptocurrency market due to the fact that its co-founder, Sam Bankman-Fried, is currently facing fraud charges.

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The Securities and Exchange Commission has repeatedly stated that, in the interest of protecting investors, it views most digital tokens as securities that are subject to the SEC's rules.

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“It was likely that stablecoins' position within legacy financial regulatory frameworks would be tested at some point as a new product using new technology for settlement and storage,” says Richard Galvin, co-founder of fund manager Digital Asset Capital Management.

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In addition to the initial statement from Galvin, he expressed the hope that "there will be a regulatory position found that balances" the benefits of stablecoins against the disclosure and protection of users.

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As a stablecoin, BUSD ranks third in market circulation after Tether's USDT and Circle's USD Coin in terms of market circulation. The market value of USDT and USDC has edged lower since FTX's collapse on Nov. 11, which took a toll on confidence in crypto exchanges generally, while BUSD has lost about $6 billion since that time.

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It has been suggested by Martin Lee, a data journalist at crypto intelligence firm Nansen, that a crackdown on BUSD might lead to investors shifting to other stablecoins as a result.

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“BUSD can technically operate as it currently does, but given all the incidents that have occurred in the past few weeks, there is a good possibility that users would choose to switch to other stablecoins that aren't directly under fire from the regulators,” Lee said.