After the news that the U.S. Securities and Exchange Commission (SEC) intends to sue the issuer Paxos for determining that the stablecoin Binance USD (BUSD) is an "unregistered security" broke earlier yesterday, there has been new progress in the incident. The cryptocurrency exchange Binance confirmed that Paxos has been instructed by the New York State Department of Financial Services to stop minting new BUSD.
So, what exactly is the stablecoin BUSD? Why are regulators eyeing BUSD? And what impact will it have on the market?
US bans Paxos from minting BUSD stablecoin
According to the Wall Street Journal, the New York Department of Financial Services (NYDFS) ordered the stablecoin issuer Paxos to stop issuing new Binance USD (BUSD). Subsequently, Binance confirmed the news.
According to a Binance spokesperson’s statement on the 13th:
Paxos informed us that the New York State Department of Financial Services has directed them to stop minting new BUSD.
The spokesperson said, “BUSD is a stablecoin wholly owned and managed by Paxos. Therefore, the market value of BUSD will only decline over time. Paxos will continue to service the product, manage redemptions, and will follow up with additional information as needed. Paxos also guarantees that funds are safe and fully backed by its bank’s reserves.”
In response to the news that the U.S. SEC plans to sue Paxos, Binance CEO Changpeng Zhao (CZ) said, "Although BUSD is called Binance USD, it is not issued or redeemed by Binance."
At the same time, CZ announced shortly afterwards that Binance will abandon BUSD as the main token for trading pairs at this time.
Binance BUSD has grown into the world's third largest stablecoin in terms of market value. Once Paxos stops issuing BUSD, its market value will begin to decline from the current approximately $16 billion. According to CoinGecko data, as of press time, BUSD is worth $0.9996, Tether (USDT) is $0.999948, and USDC is $1.
BUSD is an important cog in the Binance ecosystem and cryptocurrency community of billionaire “CZ” Zhao Changpeng. Binance Coin (BNB), the native token of Binance Exchange, fell 5.8% today upon hearing the news, and is now trading at $290.19. Other cryptocurrency markets were stable on Monday, and Bitcoin prices did not fluctuate much.
What is Paxos?
Paxos holds a New York State trust license from the New York Department of Financial Services (NYDFS), provides custody services for assets such as cash, gold, and cryptocurrencies, and is also the issuer of the stablecoin BUSD. The U.S. Office of the Comptroller of the Currency (OCC) conditionally approved Paxos' application for a national trust bank license in April 2021, but Paxos still needs to prove to the OCC with actual implementation results that its business model can operate safely. Previously, there were rumors in the market that Paxos was asked to withdraw its application for a national trust bank license from the OCC.
What is Binance Stablecoin BUSD?
BUSD, or Binance USD, is a stablecoin pegged to the U.S. dollar at a one-to-one ratio. Binance and Paxos partnered to issue BUSD in 2019 and said BUSD had been approved by New York authorities. Paxos issued BUSD (ERC-20) on the Ethereum blockchain, but on the other hand, Binance also offers the Binance-Peg BUSD (BEP-20) token on the Binance Chain, which is pegged to BUSD.
According to data from Binance’s official website, as of February 13, BUSD had 6.2 million holders.
What are stablecoins?
According to Binance, a stablecoin is a crypto asset that is pegged to an asset with a stable price, such as fiat currency or precious metals. Stablecoins exist to avoid the high volatility common in the cryptocurrency market.
There are three types of stablecoins: fiat-backed, cryptocurrency-backed, and algorithm-backed. I have also written about the details of stablecoins in my previous articles. If you don’t understand, you can go back and read the previous articles.
Fiat-backed stablecoins like BUSD are pegged to traditional fiat currencies by maintaining fiat reserves that can be redeemed for the stablecoin.
Stablecoins backed by cryptocurrencies, such as DAI, are collateralized by other cryptocurrencies. Due to volatility, they usually require overcollateralization. For example, if Ethereum is used as a collateral reserve for DAI, 1.5 to 2 times the value of the stablecoin must be reserved. If the collateralization rate is too low, liquidation will be initiated to prevent the value of the stablecoin from collapsing.
Algorithmic stablecoins do not require reserves and maintain price pegs by adjusting the supply of stablecoins through smart contracts.
BUSD and other stablecoins are under regulatory scrutiny
Regulators have expanded their scrutiny of cryptocurrency companies this year, with the U.S. Securities and Exchange Commission telling Paxos it plans to sue the company for violating investor protection laws. The SEC has never before taken enforcement action against a major stablecoin issuer.
Stablecoins have become a lucrative business in recent years. Traders who want to easily buy and sell cryptocurrencies have flocked to these dollar alternatives because they can buy and sell without bank settlement. Cryptocurrencies are volatile and bullish and bearish trends often come and go quickly, but it is troublesome to use cash to buy cryptocurrencies, and the time cost of losing money may cause investors to miss great trading opportunities.
Companies like Paxos obtain stable income by issuing stablecoins and invest users' cash deposits in short-term U.S. Treasury bonds to earn interest income.
Why did the SEC take action against BUSD?
The SEC issued a "Wells Notice" to Paxos, alleging that BUSD is an unregistered security. The Wells Notice is used to notify the companies and individuals who receive it that the SEC is about to take enforcement action. Companies and individuals who receive the notice have the opportunity to respond in writing and argue with the SEC in an effort to avoid litigation.
What is the SEC’s attitude towards stablecoins?
The SEC has previously said that stablecoins will be a focus of enforcement. SEC Chairman Gary Gensler believes that stablecoins are similar to bank deposits or money market funds. In November 2021, a subcommittee led by the U.S. Treasury Department stated that stablecoins should have a specific regulatory framework and be restricted from being issued by banks.
The SEC has been active recently. Last week, Kraken, a trading platform under Payward Inc, agreed to stop providing cryptocurrency staking services in the United States and pay a $30 million fine for selling unregistered securities as staking interest-bearing products.
BUSD is regulated. Which stablecoin is most affected?
From the perspective of market capitalization, Tether has dominated the market for a long time, but USDC also has the potential to grow in other areas.
According to Dune Analytics data, USDC’s market share has grown significantly over the past year and currently accounts for 44.4% of the entire stablecoin market. USDT and BUSD account for 35.2% and 18.7% respectively. One of the reasons for the significant growth of USDC may be the increase in yields and the significant growth in the number of holders, which has increased to more than 1.5 million people in the past few months. The number of transactions done with USDC has also increased significantly compared to USDT.
However, the sanctions on Paxos have caused panic about whether BUSD can continue to operate, leading to a "stablecoin migration" in which a large number of users exchanged their assets for other stablecoins or cash.
It is worth noting that USDC is not the first choice for this migration. On-chain data shows that USDT, which benefited the most this time, saw a surge of 4836.2% in trading volume in the entire network in a short period of time. As for the possible reason, it may be because the community has reported that USDC may also be regulated by the SEC in the near future.
Will BUSD be run?
According to data on coinmarketcap, after the news came to light yesterday, the circulating supply of BUSD dropped from US$16.15 billion to US$15.8 billion, a decrease of US$350 million, accounting for about 2% of the original total circulation.
Although there has not been a larger-scale redemption of BUSD at present, since BUSD will no longer be issued, the reduction in liquidity also means that BUSD will be permanently redeemed.
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