According to a report from Bloomberg, crypto exchange Binance’s new problems with US regulators were triggered by Circle. The company behind the stablecoin USD Coin (USDC) is expected to file a complaint with the New York State Department of Financial Services in 2022.
In the document, the company accused Binance’s BUSD stablecoin of operating without “proper” reserve management. According to people familiar with the matter, Circle facilitated data that showed its competitors were issuing BUSD without sufficient collateral to back it.
Stablecoins are tokens issued by entities; a value tied to a fiat currency, such as the US Dollar. The latter is the case for the three largest stablecoins in the market: Tether (USDT), USD Coin (USDC), and Binance USD (BUSD).
Binance Loses In Stablecoin War
Paxos Trust issued Binance stablecoin until recently. As Bitcoinist reported, the firm was hit by a lawsuit from the US Securities and Exchange Commission (SEC) for allegedly “violating investor protection laws in issuing” BUSD and offering it as an unregistered security.
Today, Paxos and Binance ended their multi-year partnership at the request of the New York State Department of Financial Services (NYDFS). Regulators claim Paxos failed to address “unresolved issues” regarding BUSD. State regulators stated the following in a statement cited by Bloomberg:
(Paxos cannot work with Binance) in a safe and sound manner based on extensive supervisory involvement, recent investigations, and Paxos’ failure to address material issues related to Paxos-issued BUSD in a timely manner. Paxos failed to address a major deficiency, requiring further Department action, ordering Paxos to stop printing Paxos-issued BUSD. The department is monitoring Paxos closely (…).
Circle Do Binance, But Why?
As a result of recent events, the BUSD is depegated from the US dollar. The token reached $0.992 during the current event. The digital asset has been moving sideways and could suffer the same fate as other stablecoins that have failed over the past year.
Changpeng Zhao, CEO of Binance, admitted that the market capitalization of BUSD will “only decrease over time.” The executive assured users that their funds were safe and “backed by reserves in the banks.” CZ stated:
“If” BUSD is ruled as a security by the courts, it will have a huge impact on how the crypto industry will develop (or not develop) in such jurisdictions. Binance will continue to support BUSD for the foreseeable future. We expect users to migrate to other stablecoins over time.
In 2022, Binance decided to “automatically convert” USDC funds and future deposits to BUSD. This decision may affect Circle’s actions.
As Ryan Watkins, a former analyst at research firm Messari highlighted the importance of stablecoins in the crypto industry and global financial prospects. This digital asset generated a transaction volume of $1.7 trillion, a 1,000% year-on-year jump, in Q1 2021, which shows the importance of stablecoins in the crypto ecosystem.
Image from Unsplash, chart from Tradingview.