Circle – the issuer of the world’s second-largest stablecoin, USDC – reportedly warned the New York Department of Financial Services (NYDFS) last Autumn that Binance has been mismanaging its token reserves.
This came months before Monday’s announcement that Paxos is ending its relationship with Binance surrounding BUSD, by order of the New York regulator.
Circle’s Private Warning
As reported by Bloomberg, USDC alerted the NYDFS to blockchain-based signs that Binance did not hold enough crypto in its reserves to support the tokens it had issued to customers. These tokens include its Binance-peg Bitcoin, Ether, USDC, BUSD, and other derivative coins designed to be circulated on Binance’s own network, BNB Smart Chain.
Binance may not necessarily deny such claims: in January, it acknowledged that there were times when its Binance-peg BUSD was not fully backed, with as much as $1 billion missing from its reserves.
Circle’s warning claimed that USDC was also undercollateralized by Binance at times. According to the source contacted by Bloomberg, Binance once supported $1.7 billion worth of Binance peg USDC using only $100 million worth of actual USDC as collateral.
BUSD and USDC are both stablecoins – crypto assets value pegged to the U.S. dollar. Whereas USDC is directly issued by Circle, Paxos issues tokens and maintains reserves in connection with BUSD. Only Binance-peg USDC, and Binance-peg BUSD, are issued by Binance directly.
However, when regulators cracked down upon BUSD on Monday, the NYDFS saw it fit to target Paxos. In an email to Bloomberg, the department claimed Paxos couldn’t 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.
Paxos will cease minting new BUSD starting February 21, after which BUSD holders will still have at least a year to cash out their holdings for either dollars or Pax Dollar (USDP) – another of Paxos’s stablecoins.
Circle VS Binance
The latest enforcement action against BUSD may work in Circle’s favor, reversing the consequences of Binance’s play to delist a swath of stablecoins in September – including USDC.
The delisted stablecoins remained supported by Binance but would be auto-converted into BUSD once they arrived at the exchange. While Circle CEO Jeremy Allaire claimed this was good for USDC at the time, BUSD’s share of the stablecoin market only grew in the aftermath – at the expense of USDC.
With BUSD set to wind down, Binance will be forced to change its treatment of stablecoins sent to its platform. The exchange’s CEO, Changpeng Zhao, has already confirmed that the company will make product adjustments, including moving away from BUSD.