Circle Sounded Initial Alarm Over Binance Reserves To NYDFS

According to a new report, USDC issuer Circle sounded the alarm about Binance’s BUSD stablecoin and its reserves to the NYDFS. 

Circle’s complaint to the New York regulator came before the NYDFS directed Paxos to stop the minting of its Binance USD stablecoin. 

Circle Behind Complaint 

According to a report, It was stablecoin issuer Circle that submitted a complaint to New York State’s Department of Financial Services (NYDFS) regarding Binance’s reserves. The complaint was made just prior to the NYDFS’s crackdown on the BUSD. In its complaint, Circle stated to the NYDFS that Binance did not have adequate reserves to back up the BUSD tokens that had been issued through Paxos. According to a source familiar with the developments, Circle’s team had uncovered the information by painstakingly studying blockchain data. 

According to an NYDFS spokesperson, Paxos had not been administering the BUSD stablecoin in a “safe and sound” manner. This, according to the spokesperson, was in violation of its obligation to conduct tailored, periodic risk assessments and due diligence refreshes of both, Binance and Paxos-issued customers and failed to prevent bad actors from potentially using the platform. 

The SEC Lawsuit Against Paxos 

Circle’s steps of going to the New York State’s Department of Financial Services about Binance’s reserves came just before it emerged that the United States Securities and Exchange Commission was planning to file a lawsuit against Paxos. According to the lawsuit, the SEC claimed that BUSD was an unregistered security. The NYDFS went ahead and announced its own action against Paxos on the 13th of February, 2023, ordering the company to stop minting Paxos-issued BUSD. 

In its response to the SEC lawsuit, Paxos stated that it categorically disagreed with the SEC and that BUSD did not classify as a security under federal securities law. It added, 

“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.”

Paxos’ Troubles Growing 

Paxos’ regulatory troubles seem to be growing, with its regulatory headache showing no signs of stopping even after the NYDFS’ ongoing investigation and the SEC’s lawsuit against the company. It has also emerged that the US Office of the Comptroller of the Currency (OCC) could also ask Paxos to withdraw its permission for a full banking charter. Paxos had already received a provisional bank charter from the OCC. However, the company has denied these claims. 

The regulatory action is the latest in a series of actions by regulators impacting crypto firms in the United States. This latest step comes after the SEC had reached an agreement with Kraken under which the company would stop offering its staking services to users based in the US. Additionally, the regulator is also continuing its engagement with Ripple and its lawsuit over XRP, which the SEC claims are securities that fall under its jurisdiction. 

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.