Per a report from Bloomberg, crypto exchange Binance’s recent issues with U.S. regulators were triggered by Circle. The company behind stablecoin USD Coin (USDC) allegedly issued a complaint to the New York State Department of Financial Services in 2022.
In the document, the company accused Binance’s stablecoin BUSD of operating without “proper” reserve management. According to a person familiar with the matter, Circle facilitated data that showed its competitor issued BUSD without sufficient collateral to back it.
Stablecoins are tokens issued by an entity; their values are tied to a fiat currency, such as the U.S. Dollar. The latter is the case for the three largest stablecoins in the market: Tether (USDT), USD Coin (USDC), and Binance USD (BUSD).
Binance Takes A Loss In Stablecoin War
Paxos Trust issued Binance’s stablecoin until very recently. As Bitcoinist reported, the firm was slammed by a lawsuit from the U.S. Securities and Exchange Commission (SEC) for supposedly “violating investor protections laws in issuing” BUSD and offering it as an unregistered security.
Today, Paxos and Binance ended their multi-year partnership upon request of the New York State Department of Financial Services (NYDFS). The regulator claims Paxos failed to address “unresolved issues” regarding BUSD. The state regulator stated the following in a statement cited by Bloomberg:
Circle Takes Aim At Binance, But Why?(Paxos is unable to work with Binance) 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 (…).
As a result of recent events, BUSD depeged from the U.S. dollar. The token hit a lot of $0.992 over today’s event. The digital assets have been moving sideways and could suffer the same fate as other failed stablecoins over the past year.
Changpeng Zhao, CEO of Binance, acknowledged that BUSD’s market capitalization will “only decrease over time.” The executive reassured users that their funds are safe and “fully covered by reserves in their banks.” CZ stated:
“IF” BUSD is ruled as a security by the courts, it will have profound impacts on how the crypto industry will develop (or not develop) in the jurisdictions where it is ruled as such. Binance will continue to support BUSD for the foreseeable future. We do foresee users migrating to other stablecoins over time.
In 2022, Binance decided to “automatically convert” any USDC funds and future deposits to BUSD. This decision might have influenced Circle’s actions.
As Ryan Watkins, a former analyst at research firm Messari highlighted the importance of stablecoins in the crypto industry and the global financial outlook. These digital assets saw $1.7 trillion in transaction volume, a 1,000% spike year-over-year, in Q1 2021, which hints at the importance of stablecoins in the crypto ecosystem.
Image from Unsplash, chart from Tradingview.
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