New York Department of Financial Services orders Paxos to stop BUSD stablecoin creation

Recently, rumors emerged that Paxos Trust, a regulated company that created the Binance USD (BUSD) stablecoin, received a notification from the US SEC that it is about to receive a lawsuit. The notice, known as Wells Notice, grants the receiver a 30-day period to build up a case and respond to the regulator with an explanation that would explain why the lawsuit should be dropped.

The SEC has labelled BUSD as an “unregistered security”, and is suing its issuer, Paxos.

But how on earth is a STABLECOIN considered a security, when it clearly doesn’t meet the Howey Test criteria.

No one has ever had “the expectation of profit” when buying $BUSD. pic.twitter.com/QXOlDUyvc3

— Miles Deutscher (@milesdeutscher) February 13, 2023

However, less than 24 hours after the rumors emerged, another regulator — the New York Department of Financial Services (DFS) — got involved, ordering Paxos to immediately stop issuing new BUSD.

Binance USD reacts to the news

Binance USD is the third-largest stablecoin in the crypto industry, and whale Paxos Trust — a regulated crypto company — received permission from Binance to use its brand for the issuance and distribution of BUSD tokens, it is still Paxos-owned and issued token. The token itself is USD-pegged and backed, and it has been in circulation since 2019. Not only that, but Binance stated that the stablecoin was approved by New York’s financial regulator at the time.

Following the recent news involving not one but two regulatory bodies, BUSD price slightly strayed from the dollar peg, dropping to $0.98, which came as a signal that traders are converting their tokens into a different stablecoin — BUSD rival, Tether.

Binance’s native cryptocurrency, BNB, also saw a price drop this Monday, going down by over 10%. Clara Medalie, research director at crypto data firm, Kaiko, stated that “Traders holding BUSD are looking for the quickest way to exit.” Meanwhile, since Binance lists both its own stablecoin and Tether, it was fairly easy for the users to exchange BUSD for USDT.

Medalie also added that the move has taken out one of the major USDT competitors, further solidifying the largest stablecoin’s position.

Stablecoins became a crucial part of the crypto industry

Companies like Paxos found safety and security in stablecoins, as they became a highly popular type of crypto in the last several years. Thanks to their USD peg and backing, stablecoins are immune to crypto volatility. As a result, holding them allows crypto users to continue holding cryptocurrencies, but they eliminate the risk of having their funds devalued in price drops.

This has served the community well during bearish periods and even the last two crypto winters. Since it sometimes takes a while to exchange crypto for cash, the safest way to hold the coins is in the form of stablecoins, which allows firms like Paxos a steady source of business and activity.

“DFS has ordered Paxos to cease minting Paxos-issued BUSD as a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance through Paxos-issued BUSD.” https://t.co/oV3sn6TvDc

— Muyao (@MuyaoShen) February 13, 2023

However, according to the DFS, Paxos failed to conduct periodic risk assessments and due diligence of Binance and BUSD holders. A person familiar with the matter stated that this is what caused the regulator to issue the order. Paxos responded that it would stop issuing BUSD on February 21st and that the move would mark the end of its relationship with Binance.

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