Stablecoin Issuer Circle Warns NYDFS over Binance USD (BUSD) Reserves

As the New York Department of Financial Services (NYDFS) ordered Paxos to stop issuing Binance USD stablecoins, other market players have started weighing the consequences. Circle, the issuer of the world’s second-largest stablecoin USDC noted that it warned NYDFS last year over Binance’s mismanagement of reserves for its BUSD reserves. As per the Bloomberg report, Circle alerted the watchdog last autumn noting that its team had spotted blockchain data that showed that Binance didn’t have enough reserves to support the issued tokens.

This includes tokens like BUSD, Binance-peg Bitcoin, Ether, and other derivative coins designed to circulate on Binance’s native network, BNB Smart Chain. The news comes hours after the NYDFS asked Paxos to stop issuing the BUSD stablecoin citing “several unresolved issues related to Paxos’ oversight of its relationship” with Binance in regard to BUSD. In an email to Bloomberg, a spokesperson for the regulator stated:

The NYDFS determined that Paxos was unable to operate BUSD “in a safe and sound manner based on extensive supervisory engagement, a recent examination, and failure of Paxos to remediate material issues related to Paxos-issued BUSD in a timely manner. Paxos failed to address key deficiencies, requiring further Department action, ordering Paxos to cease minting Paxos-issued BUSD. The Department is monitoring Paxos closely to verify that the company can facilitate redemptions in an orderly fashion subject to enhanced, risk-based, compliance protocols”.

Binance vs Circle

Binance may not necessarily deny the claims from Circle. Last month in January, Binance also acknowledged that there were times when Binance-peg BUSD was not fully backed. Reportedly $1 billion were missing from its reserves.

In its warning, Circle claimed that even the USDC was uncollateralized by Binance back then. As per the source contacted by Bloomberg, Binance once supported $1.7 billion worth of Binance peg USDC by using USDC collateral only worth $100 million.

The latest enforcement on Binance USD stablecoin could work in Circle’s favor. Last September, crypto exchange Binance announced to delist USDC stablecoins in a direct attack on Circle. Although the BUSD market share surged at the expense of Circle’s USDC, Binance is facing a tough time now.

With BUSD stablecoin winded down by regulators, Binance might need to reconsider its treatment of stablecoins sent to its platform.

Apart from NYDFS, the SEC is also planning to sue Paxos over its issuance of Binance’s BUSD. Reports suggest that the SEC treats BUSD as an unregistered security. This could be a major regulatory escalation and the first towards a stablecoin issuer. This year, the SEC is likely to introduce clear regulations on stablecoins.