The US SEC and a financial regulator in New York have launched investigations against Paxos, the operator of BUSD stablecoin which is owned by Binance exchange. It is unclear whether the attack is solely directed towards Binance or whether other stablecoin issuers could be targeted next. Recently, the New York state financial regulator requested that Paxos stop issuing new BUSD and USDP tokens, which caused the PayPal payment platform to halt development of its stablecoin with Paxos.
The US stock market regulator has also filed charges against Paxos Trust, stating that the dollar-backed token is a security issued without the regulator’s permission. This could potentially render the circulation of BUSD in the US illegal. The repercussions could be severe, with assets pegged to BUSD potentially being frozen or confiscated, leading to a collapse of Binance and a subsequent crash of the entire cryptocurrency market.
There are many strange details in this story and a number of obvious questions arise.
- Why are the cases brought against Paxos and not Binance, the actual owner of the asset?
- Why did two regulators simultaneously launch an investigation against the Binance stablecoin? Other stablecoins from Paxos are not mentioned in the SEC notice. Paxos also issues its own set of stablecoins, the most famous of which are USDP (formerly PAX Dollar) and gold-backed Paxos Gold. But only NYDFS doubts their legitimacy. Why do regulators have no doubts about USDC, USDT and a host of other dollar stablecoins circulating on the US market as well?
- Why did the information about the investigation appear only now?
Let’s try to answer each of the questions.
Why Paxos, not Binance, was accused of illegally issuing BUSD
If you do not make assumptions about some kind of secret agreements, the first question is easier to answer than all the others.. Paxos is one of the oldest American cryptocurrency companies. In 2015, she was one of the first to obtain a BitLicense, issued exclusively in the State of New York.. Therefore, it falls under the jurisdiction of both the US federal regulatory authorities and New York State agencies.
Although Paxos is just a technical operator of BUSD, from a formal point of view, it is this company that issues tokens and controls the turnover.. Moreover, this release takes place in the United States without coordination with regulators.. So this is the first legitimate victim. The charges against Binance may be added to the case later, based on the testimony of Paxos representatives.
On the other hand, Binance is an offshore company and is not formally under US jurisdiction.. Although we all know very well what extraterritoriality is. And its division Binance.US is engaged only in local trading and is not related to the release of the BUSD stablecoin.
US regulators can ban the activities of a foreign company only on their territory, and citizens of other countries will have to be accused and put on the wanted list through their law enforcement agencies or Interpol. Therefore, it will be easier to conduct a case against Paxos from all sides.
Why two regulators launched an investigation at the same time
The funny thing about this story is that Binance, which previously defeated the rival exchange FTX, itself became the victim of a corporate denunciation from competitors in the field of stablecoins and in the division of the US cryptocurrency market: a bundle from the payment company Circle and the Coinbase exchange.
Circle, like Paxos, issues and maintains the USDC dollar token for Coinbase, the largest cryptocurrency exchange in the United States. This means that Binance ran across the road to its main competitor.
According to media reports, it was Circle who reported to the NYDFS (New York State Department of Financial Services) on Binance, demanding an investigation into the legality of issuing BUSD.. Probably a similar request was sent to the SEC. And when the NYDFS published information about the investigation into Paxos, their colleagues in the SEC decided to keep up.. Of course, in the spirit of professional solidarity. Or rivalry.
The formal reason for the accusations from the NYDFS was the issuance of BUSD on the BNB Chain blockchain, while the original permission provided for their release only on Ethereum. If there really is such a clause in the agreement, it is very strange that Paxos did not apply for its extension.. In addition, Circle stated that Paxos and Binance do not have sufficient collateral to support BUSD.. These claims have not been substantiated.
Circle “surrendered” competitors a few months ago – that is, around the same time that Changpeng Zhao destroyed FTX with one tweet. But Circle itself, for some “hard to explain” reasons, is not afraid of accusations against its stablecoin.. When Fox Business journalist Eleanor Terrett tweeted about possible action against Circle, the company’s reaction was immediate — 15 minutes later, a retraction appeared, the tweet was deleted, and the journalist had to apologize at length.
Circle has previously been in trouble with Binance and had a reason for revenge. In September, Binance decided to force the conversion of three stablecoins on its balances, including 3 billion USDC, into BUSD.. This was explained by low turnover of tokens and reduced risk for traders.. However, USDC is the second largest and perhaps the first most reliable centralized stablecoin, and Binance’s explanation was not convincing.. We probably see only a small part of the “undercover games” between the issuers of the largest stablecoins, information about which has not been released to the public space.
Why was the information about the investigation published only in February
According to Bloomberg, Circle pitched the idea to regulators to investigate Paxos last year.. The initial collection of information also takes time.. NYDFS investigators could not ban the issuance of BUSD based on the letter from Circle alone.
It is unlikely that the publication of notices of the opening of the investigation against Paxos was planned, but the self-interest of some employees of the relevant authorities plus other interested parties cannot be ruled out.. The moment for the new “black swan” in the cryptocurrency market was chosen very well. In January, the market began a serious rebound upwards and in early February, BTC was near $24,000, the highest since August last year.
Allegations against Paxos caused major cryptocurrencies to drop more than 10% in one day. On February 13, another jump started, and bitcoin even briefly overcame the historical milestone of $25,000. However, this growth occurs on such small volumes compared to January that it is difficult to hope for development. In conditions of economic and political uncertainty, any negative information or even the absence of positive information will easily cause a new collapse.
Who is threatened by a possible BUSD ban and Binance reserve freeze
So, who will be the main victim of a strange investigation? Is this the start of an offensive against all non-government stablecoins or a targeted attack against Binance?
Of the three largest stablecoins, the smallest by capitalization was chosen. Not an offshore USDT with its rather dark past, not a USDC run by a more than loyal American company. Namely, BUSD, the weakest of the three, and, most importantly, owned by an exchange that does not seek to comply with the requirements of US regulators regarding AML and enforce sanctions.
Along the way, Paxos stablecoins and the company itself, which previously had considerable weight in the industry, will suffer.. But when compared with Binance, the problems will have little effect on the capitalization and exchange prices of other cryptocurrencies.
In addition, Reuters reports that Changpeng Zhao has been secretly transferring money from Binanse US accounts at Silvergate Bank to his company Merit Park for more than two years.. And this already gives rise to accusations against the founder of Binance himself.
There are two main scenarios for the development of events:
- American regulators will begin to gradually push out of the market all “doubtful stablecoins” that are not associated with large American banks. In this case, the next target will be Tether, the largest stablecoin issued by a dubious offshore company on the income of an equally dubious offshore exchange.. USDC will last longer than others, but it will also be strangled when corporate stablecoins or even the Fed-approved digital dollar take over.. In this case, actions will develop slowly, probably over several years.
- The overt or covert goal of the regulators will be the collapse or maximum weakening of Binance. Then banning the issuance of BUSD would be just the first step.. It may be followed by the arrest of BUSD collateral or even Binance US accounts, as well as the opening of a criminal case against Changpeng Zhao himself.. The latter will be fully justified if the Reuters information is confirmed.
In the medium term, the second option is more likely. After the events around FTX and the January rumors of an investigation against Binance by the regulator, the largest cryptocurrency exchange in the world has already begun to lose its former power. In just a few days in January, it lost more than $3 billion of client deposits in cryptocurrencies alone, and this is only the part that can be tracked through public blockchains.. The volume of withdrawals in fiat currencies is unknown. However, it can be calculated from indirect data.
In January, Binance began actively using reserves from BUSD collateral to pay off debt and other operating expenses.. BUSD capitalization fell from $23.5bn in November to $16bn in January. In February, the decline continued, although more slowly, but on February 13, a new collapse began. After the SEC statement, the flight of customers from Binance resumed, the exchange lost about $1 billion of deposits in a day. This means that the decline in BUSD capitalization will continue, as it is the main source of liquidity at such volumes, when the outflow of deposits many times exceeds the inflow.
In less than a week, almost $3 billion went out of BUSD, and on February 18, the capitalization of the token fell to $13.3 billion. Almost every day, according to Coinmarketcap, the capitalization of the token falls by several hundred million dollars.. In just a few months, Binance has lost more than $10 billion, that is, 42% of its main egg. But the regulators have not made any decision yet.
Amid such a rapid withdrawal of assets, Tether celebrates victory, single-handedly capturing more than half of the stablecoin market. Fortunately, the 51% attack is not relevant for tokens.
Binance Seeks to Reduce BUSD Collateral Reserves for Other Reasons. It is now more profitable for the exchange to put this money into circulation until it is seized and withdraw it from assets controlled by American regulators. Therefore, Binance continues to quickly and systematically withdraw money from BUSD.
Perhaps in the future, the exchange will issue a new stablecoin, and for another fiat currency. However, the euro also does not look like a reliable option to replace the dollar, and in Asia the number of stable currencies is limited.. Except for the yuan, which is unfriendly to cryptocurrencies, you can only count on the Japanese yen or Korean won, as well as the Singaporean and Hong Kong dollars. But their liquidity in markets outside the Asia-Pacific region is many times lower than that of the US dollar or euro.
Changpeng Zhao’s Throwing Is Notable As New Wave Of Attacks On Binance Develops. At first, the CEO was indignant at the unfairness of the accusations and even predicted the future of the cryptocurrency industry without dollar stablecoins.. However, later, having soberly assessed the situation or talked to the right agents, Zhao gave up and the exchange declared its readiness to comply with all the requirements of the regulators, paying heavy fines in order to remove the charges.
Will the American authorities accept the surrender, or will a dead Binance be more useful than a live and obedient one? A new high-profile case and the bankruptcy of the largest exchange will undermine investor confidence for many years and bring down the cryptocurrency market. And regulated exchanges in the US are enough without Binance.
It is also possible that regulators will perform both tasks at the same time.. The weakening of the influence of cryptocurrency exchanges and the suffocation of relatively independent stablecoins will contribute to the emergence of the digital dollar and other state digital currencies.
Impact on the entire market
The pressure on the cryptocurrency industry is intensifying. Two whales of the crypto-currency world, Binance and Grayscale, have already managed to swing well and force them to fight for survival. If you manage to sink both, Tether will also collapse, because it is also very easy to start an investigation against it: there are enough reasons.
After the fall of all three whales, a “domino effect” may begin, which will bury the cryptocurrency industry in its current form.. Then, according to tradition, a new building will be erected on the ruins – from regulated companies that are ready to provide all the information about their customers. And the lot of crypto-anarchists will remain the black market, which without the support of big capital will have to drag out a miserable existence.
If regulators still accept Binance’s capitulation, deciding to limit themselves to fines, the market can hope for short-term relief and resumption of growth.. And yet there are still not enough serious fundamental factors for a confident upward trend reversal.