Circle Reports Paxos to NYDFS Claiming Binance’s Stablecoin Reserves Are Not Fully Backed

The top financial regulator in New York is currently investigating stablecoin issuer Paxos while competitor Circle was the one to raise the alarm.

In autumn of 2022, Circle alerted the New York Department of Financial Services, or NYDFS, that Binance's reserves were insufficient to support its tokens, potentially even including stablecoin Binance USD. The information was reportedly retrieved through blockchain data. 

This came to light months later in a February 13th Bloomberg report under the headline Stablecoin Issuer Circle Warned New York Regulator About Rival Binance’s Token. That same day, NYDFS announced its own regulatory action, claiming that Binance USD was an unregistered security, and ordered Paxos to “cease minting Paxos-issued BUSD.”

On the Paxos homepage, the company describes itself as the “largest issuer of regulated, transparent stablecoins” and drama began to unfold.

In response to the NYDFS regulatory action, Paxos issued a statement that same day:

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.

While the crypto industry and its regulations are both constantly changing, the NYDFS directive to cease minting BUSD was largely seen as an overstep, since BUSD has not been identified as a security under federal laws.

Online, people were quick to applaud Paxos' response.

"Nice. Thanks for standing up to these guys," tweeted user Cryptohat.

“Well done team,” wrote CryptoAlerts365. "This isn’t just your fight, it’s a crypto community fight."

As the tides of regulation continue to ebb and flow, it remains to be seen how this skirmish will turn out.