Circle Warned About Binance’s Reserve Status Months Before Regulatory Action Against BUSD
Months prior to U.S. regulators ordering Paxos to stop minting Binance USD (BUSD) token, USDC stablecoin issuer Circle complained about Binance's capital mismanagement.
As regulatory action against stablecoin issuers by U.S authorities is heating up, it was reported that months prior to the SEC and New York State Department for Financial Services (NYDFS) ordering Paxos Trust Co. to stop issuing Binance’s BUSD stablecoin, Circle had complained to regulators about the status of the crypto exchange’s reserves.
According to an expose by Bloomberg, last autumn, Circle – issuers of the USD Coin (USDC) – lodged a complaint with the NYDFS alleging that Binance was misrepresenting the crypto assets held in its reserves. The stablecoin issuer discovered on-chain data which showed that the company did not hold enough capital in its treasury to back tokens it had issued.
Binance, which is the world’s largest cryptocurrency exchange by trading volume, is powered by its own blockchain protocol – Binance Smart Chain (BSC). In order for the network to support tokens issued on other chains, the company mints Binance-peg or B-Token versions of popular cryptocurrencies, such as B-BTC for Bitcoin (BTC), B-ETH for Ethereum (ETH) and B-USDC for USDC. These B-tokens are backed 1:1 with the original asset in Binance’s reserves.
However, not everything was smooth sailing, as it was later discovered and even admitted by Binance that the company regularly undercollateralized BUSD reserves for Binance-peg versions of the token. Binance would issue new B-BUSD without holding enough BUSD as collateral in the treasury. Circle was a victim of this issue, where in one instance the crypto exchange minted $1.7 billion worth of Binance-peg USDC while holding only 100 million USD Coin. This resulted in USDC losing its stablecoin market share.
Binance also acknowledged that it would regularly mix B-tokens together with customer assets on the platform to provide liquidity for its reserves and transfer these assets to its own collateral wallets. In September 2022, the crypto exchange announced that it would automatically convert all user balances in USDC, Paxos USD (USDP) and True USD (TUSD) to BUSD. The stablecoin’s market share rose from 10% to 15% within weeks of the announcement. Three months later, the exchange revealed that only the ERC-20 token standard version of BUSD, which is issued by Paxos, is regulated by the NYDFS. Meanwhile, Binance-peg versions of the token are issued by the company itself and are not regulated.
Earlier this month, the U.S Securities and Exchange Commission (SEC) filed a wells notice against BUSD issuer Paxos, alleging that the company was offering and selling the token to investors as an unregistered security. The NYDFS followed through on the lawsuit by ordering the company to halt minting the token.
On February 13, Paxos released a statement saying it was involved in no wrongdoing and is “prepared to vigorously litigate if necessary”. The stablecoin issuer announced that the Binance partnership will be terminated and will no longer issue BUSD after February 21. Paxos has been maintaining reserves and minting the Binance-branded token since 2019. BUSD is the third-largest stablecoin in the crypto market and the most traded asset on Binance. At its prime, the token had a market cap of $16 billion, which now has fallen to $13.9 billion. BUSD also lost its dollar peg and is currently trading at $0.99.
Paxos has promised to redeem BUSD holders until January 2024. Following the Paxos announcement, Binance CEO Changpeng “CZ” Zhao stated that the company will be diversifying its stablecoin portfolio away from BUSD by providing support for USDC, USDT and TUSD tokens. The founder warned that the current stance of U.S. regulators on USD-backed stablecoins will force the industry to look into non-dollar-based crypto or algorithmic stablecoins. On February 14, Binance minted 50 million TUSD through a TrustFi smart contract on the Ethereum blockchain, leading to TRU prices surging by 200%.
At the time of writing, BNB, the native token of Binance Smart Chain, is trading at $316.27 – up by 1.8% in the last 24 hours. The token which had lost over 5% of its value earlier last week has since recovered.