On Monday 13th Feb, the US intensified its regulatory crackdown on the struggling crypto industry, bringing major stablecoin issuer and the world’s largest exchange Binance under renewed scrutiny, alongside other digital asset companies.
New York State Department of Financial Services Targets Paxos and Binance
In a move indicating a growing crackdown on the crypto industry, the New York State Department of Financial Services has instructed Paxos Trust Co. to cease the issuance of new tokens for BUSD, a stablecoin affiliated with Binance that has a circulating supply of approximately $16 billion. This action, which targets two key elements of the crypto market – the most widely traded type of tokens and the largest exchange that facilitates their trading – illustrates the regulatory authorities’ determination to become more stringent on the sector after years of being relatively hands-off.
Last year’s market declines and high-profile blowups, including alleged fraud at bankrupt exchange FTX and crypto failures that burned big players and everyday investors alike, have added urgency to the task of oversight.
SEC Takes Stronger Approach to Crypto Enforcement
Recently, the US Securities and Exchange Commission has been adopting a more robust approach to enforcing regulations in the crypto industry. The agency aims to challenge the prevailing notion in the sector that its assets do not meet the criteria for securities that require registration. Last week, it reached a settlement with the crypto exchange Kraken for offering “staking” services and has previously stated that certain stablecoins may fall under the definition of securities.
Stablecoins in the Crypto Industry
Stablecoins, such as Paxos’s BUSD, Tether’s USDT, and Circle’s USDC, are cryptocurrency tokens designed to maintain a stable value, typically pegged to a particular currency such as the US dollar. They are available in various types, some of which are backed by reserves such as cash and bonds. Stablecoins are frequently utilized by investors as they switch between different types of cryptocurrencies, with the current circulation of stablecoins amounting to approximately $136 billion.
BUSD, Binance’s Third-Largest Stablecoin, Acts as a Cog in Binance Ecosystem
Binance has been placing a greater emphasis on its branded stablecoin BUSD, which serves as a crucial component within its own cryptocurrency ecosystem and the broader digital asset industry. As the third-largest stablecoin, BUSD has played a significant role in facilitating trading activities within Binance, helmed by its billionaire founder Changpeng “CZ” Zhao. However, Binance, whose headquarters remain undisclosed, has been subject to regulatory investigations and increased oversight in multiple jurisdictions, including the US.
Paxos Faces Possible Lawsuit from the SEC
According to a report by Dow Jones, Paxos may be at risk of being sued by the SEC for breaking laws that protect investors. The SEC has sent Paxos a Wells notice, which claims that BUSD, the digital asset in question, is an unregistered security. Paxos acknowledged receiving the Wells notice in a statement on Monday, stating that it strongly disagrees with the SEC staff’s position as BUSD does not fall under the category of a security according to federal securities laws. Paxos also stated that there are no other allegations against it.
Impact on Binance and Crypto Markets
As a result of the partnership termination between Paxos and Binance, US customers will find it increasingly challenging to access Binance’s platform. After Binance’s initial announcement of the termination with Paxos, there was a sharp rise in customer withdrawals of stablecoins, with approximately $183.8 million withdrawn from the platform after 8 am London time, as reported by CryptoQuant. According to Coinglass’s analysis of the platform’s reserves, there was an overall rise in withdrawals, with customers pulling out $462 million worth of cryptoassets from the exchange in the last 24 hours. Binance Coin, the native token of Binance’s exchange, experienced a decline of up to 8.9% on Monday, reaching its lowest point since mid-January.
Withdrawals Spike from Binance
In response to the news, there has been a significant spike in withdrawals from Binance, with customers pulling out $462 million worth of crypto assets from the exchange in the last 24 hours, according to an analysis of the platform’s reserves by Coinglass. The data provider tracked outflows across multiple exchanges, and this particular outflow was the highest amount recorded.
According to CryptoQuant, withdrawals of stablecoins from Binance spiked following the exchange’s initial announcement of its termination with Paxos, with roughly $183.8 million in stablecoins withdrawn from the platform after 8 am London time.
Market Reaction
Binance Coin, the native token of Binance’s exchange, sank as much as 8.9% on Monday, reaching its lowest point since mid-January. Along with other smaller tokens, both Bitcoin and Ether experienced a decline, causing a drop in the broader crypto market.
Binance Responds
Binance’s CEO, Changpeng Zhao, commented on the matter in a tweet, saying that the exchange would move away from using BUSD as the main trading pair on its platform.
This decision comes as part of Binance’s wider strategy to migrate away from relying on other stablecoins and instead use its Binance USD (BUSD) as the primary USD-denominated stablecoin on its platform. The exchange began transitioning traders toward using the BUSD stablecoin last year by automatically converting deposits of most top stablecoins into the branded token, pushing up the share of BUSD on its platform.
The exchange has yet to comment on whether it plans to change this policy following Paxos’s announcement.
Final Thoughts
The regulatory crackdown on the crypto industry is not a new phenomenon, and the recent action against Paxos and Binance is part of a wider push to ensure that the sector is more tightly regulated. While stablecoins have become an essential part of the crypto ecosystem, the fact that they are intended to hold a set value, for example, $1, means that they are effectively acting as a digital representation of fiat currency. As such, it is not surprising that regulators are taking a closer look at these assets, and it is likely that other stablecoin issuers may face similar scrutiny in the coming months.
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