The New York State Department of Financial Services (NYDFS) has ordered crypto firm Paxos to cease minting Binance USD (BUSD). Paxos says it will stop issuing new BUSD from Feb. 21, and that it will work in coordination with the NYDFS to manage the existing reserves. It assured BUSD holders that the tokens are fully backed, and will be redeemable until at least next year.

Paxos also confirmed that the SEC is considering taking action on the basis that BUSD is an unregistered security. In a statement, it said, “Paxos categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws.” The two moves by authorities have spooked investors and could have wider implications for the crypto industry.

What it means for crypto investors

Several news sources are talking about a regulatory crackdown on crypto, particularly as the Binance USD news comes days after the SEC demanded Kraken cease its staking-as-a-service program. But SEC Chair Gary Gensler has been warning that many crypto exchanges are trading unregistered securities and talking about the dangers of stablecoins since his first speech on crypto back in 2021. It is nothing new.

What does this mean for BUSD?

Essentially, after Feb. 21, no new BUSD will be issued. But Paxos says all the BUSD in circulation are backed “1:1 with US dollar-denominated reserves.” If you hold BUSD, you should be able to redeem them. Indeed, the NYDFS says it will monitor Paxos closely to ensure this will happen.

The amount of BUSD in circulation will slowly shrink as people redeem their tokens. Binance founder and CEO, Changpeng Zhao tweeted, “BUSD market cap will only decrease over time.” He said that Binance will also move away from using BUSD as the main trading pair on its platform.

What does this mean for Binance and Binance.US?

Binance is one of the biggest crypto exchanges in the industry, and Binance.US — its separate U.S. entity — ranks in CoinMarketCap’s top 10. The news that Paxos will stop issuing BUSD is concerning, as was a move last week from Binance to halt U.S. dollar withdrawals and deposits on its main platform. According to CoinGecko data, Binance Coin (BNB) fell around 10% following the news, but has since recovered slightly.

Circle Tipped Off the NYDFS

In the wake of the investigation of Paxos Trust, the issuer of the Pax Dollar (USDP) and Binance USD (BUSD) stablecoins, it has been revealed that Circle tipped off New York’s top financial regulator about the BUSD reserves.

Bloomberg reported that Circle complained to the NYDFS in the fall of 2022 that blockchain data showed that Binance did not have enough reserves to back up the BUSD tokens it had issued through Paxos.

Binance Has Undercollateralized Reserves

While the tip-off from Circle came in the fall, Binance acknowledged in January 2023 that there were times when its Binance-peg BUSD was not fully backed. However, the reports claim it was worse than Binance affirmed.

According to Circle, at one time, Binance, the world’s largest crypto exchange, once supported as much as $1.7 billion worth of the stablecoin using only $100 million worth of actual USDC as collateral.

Paxos Investigated, Ordered to Stop BUSD Issuance

The report comes only a day after we reported that Paxos was ordered by the NYDFS to stop issuing BUSD stablecoins and is being investigated by the Securities and Exchange Commission for offering unregistered securities.

According to the regulators, the stablecoin issuer did not operate BUSD “in a safe and sound manner based on extensive supervisory engagement,” and couldn’t resolve issues related to Paxos-issued BUSD in a timely fashion.

As part of the crackdown, Paxos will stop minting new BUSD from February 21st. However, users of the stablecoin have at least a year to cash out their holdings for either dollars or its other stablecoin, the USDP.

As a result, Binance has seen a surge of withdrawals over the last 24 hours as users cash out their BUSD holdings. While the BUSD has held on to its dollar peg, the market cap of the stablecoin has fallen from $16.15 billion to $15.6 billion in the last day.