Binance and Paxos Caught up in Crypto Regulatory Crackdown

Paxos, the largest issuer of regulated stablecoins, has announced it will end its relationship with Binance, and cease issuance of new Binance USD (BUSD) stablecoin tokens starting February 21, after regulatory scrutiny from the New York Department of Financial Services (NYDFS).

NYDFS Forces Paxos to Halt BUSD Issuance

The NYDFS ordered Paxos to stop minting BUSD tokens due to “several unresolved issues related to Paxos’ oversight of its relationship with Binance through Paxos-issued BUSD.”

This is not the first time that Binance, the world’s largest crypto exchange, has found itself in hot water with U.S. regulators. Binance has been under investigation since 2018 over its compliance with U.S. anti-money laundering rules, according to Reuters.

According to Coinmarketcap, BUSD is the seventh-largest stablecoin by market cap and its value its pegged to the US dollar. In a blog post dated November 2022, Binance said it allows Paxos to mint new BUSD on the Ethereum blockchain and provides it licensing support. The post also said that the BUSD token was “approved by the New York Department of Financial Services” with reserves held only in Federal Deposit Insurance Corporation (FDIC)-approved accounts.

“All BUSD tokens issued by Paxos Trust have and always will be backed 1:1 with US dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts,” Paxos reassured investors in a statement.

Binance CEO Changpeng Zhao also took to Twitter on Monday to reassure investors that funds were safe in BUSD. He also confirmed that Paxos would continue to manage redemptions of the BUSD stablecoin.

The NYDFS also said that it “is monitoring Paxos closely to verify that the company can facilitate redemptions in an orderly fashion subject to enhanced, risk-based, compliance protocols.”

Paxos offered BUSD alongside its USDP stablecoin and the PAXG gold-backed crypto token. Paxos previously received over $500 million in funding from leading investors including PayPal Ventures and notes former FDIC Chair Sheila Bair on its board.

More Regulatory Pain Ahead?

Regulators are sharpening their focus on cryptocurrency firms and it seems they’ve just started. The action against Paxos shortly followed a report from the Wall Street Journal that the Securities and Exchange Commission (SEC) was planning to launch a lawsuit against the crypto-platform for violating investor protection laws. Just last week, San Francisco-based Kraken exchange settled with the SEC by paying $30 million in fine and halting its US staking-as-a-service business.

The pressure on the Paxos platform to halt its issuance of the BUSD stablecoin is another blow to the Binance exchange. Binance’s CEO Zhao said that if BUSD was ruled to be a security, “it will have profound impacts on how the crypto industry will develop in the jurisdictions where it is ruled as such.”