Everyone seems shocked by the recent New York Department of Financial Services (NYDFS) order barring Paxos to mint the BUSD stablecoin. Many speculate that the ban rides on the back of a US SEC wells notice to Paxos classifying BUSD as security.
As reported, on Monday, February 13th, the NYDFS ordered Paxos to cease the minting of BUSD. The regulator cited “several unresolved issues related to Paxos’ oversight of its relationship with Binance in regard to Paxos-issued BUSD.”
However, reports suggest that securities laws supervised by the SEC have nothing to do with the NYDFS ban.
Many Believe Otherwise
According to a Bloomberg report, Circle Internet Financial, the issuer of USD Coin (USDC) stablecoin, complained to NYDFS about Binance’s mismanagement of reserves for its stablecoin months before the ban.
Binance mints many third-party coins, called Binance-peg or B tokens, backed by 1:1 reserves so they can be used on other chains, such as BNB Chain. However, the exchange has acknowledged in the past issues with having historically undercollateralized the reserves for many of its B tokens.
Citing these issues, many in the crypto industry argue that the BUSD ban is tied to Paxos’ relationship with Binance regarding the issuance of BUSD. In the statement banning Paxos to mint BUSD, the NYDFS noted that the “Department authorized Paxos to issue BUSD on the Ethereum blockchain. The Department has not authorized Binance-Peg BUSD on any blockchain, and Binance-Peg BUSD is not issued by Paxos.”
Therefore, lawyer Collins Belton believes that:
“NYDFS’s real motivation is actually Binance Pegged BUSD and alleged instances of it falling short of full backing. I’m sure ML/OFAC investigations increased attn, but seemingly not main driver. Makes sense given their tether experience.”
Paxos “Categorically Disagrees” With SEC
In a statement on Monday, Paxos said that it “categorically disagrees” with SEC’s stance labelling BUSD as a security under federal laws. The statement reads:
“Paxos categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws. This SEC Wells notice pertains only to BUSD. To be clear, there are unequivocally no other allegations against Paxos. Paxos has always prioritized the safety of its customers’ assets. BUSD issued by Paxos is always backed 1:1 with US dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts. We will engage with the SEC staff on this issue and are prepared to vigorously litigate if necessary.”
For Collins Belton, it is surprising that the stablecoin issuer is only addressing the SEC issue. The rumored SEC lawsuit against the company may be the reason. However, it seems that the commission is separately looking at the securities status of BUSD and has no relation to this ban.
According to Collin Wu, a Chinese crypto reporter:
“The real reason seems to be: Binance-Peg BUSD, Circle’s complaints and Paxos’ poor response.”
