Circle alarmed the New York Department of Financial Services (NYDFS) that Binance's stablecoin was not fully backed, stated Bloomberg.
The news sent shockwaves through the crypto community, as Paxos, the issuer of the stablecoin, had previously claimed that it was fully collateralized.
This revelation has raised questions about the reliability of stablecoins and the need for greater oversight in the crypto space.
New York's top financial regulator is investigating stablecoin issuer Paxos, and according to a recent report, it was rival stablecoin issuer Circle that raised the alarm. Bloomberg reported on Monday that Circle had alerted the New York Department of Financial Services (NYDFS) in the fall of 2022, citing blockchain data that suggested Binance did not have enough reserves to back up the BUSD tokens it had issued through Paxos.
The news comes several days after the first report that NYDFS was investigating Paxos. On Monday, an NYDFS spokesman told Reuters that Paxos had not been administering BUSD in a “safe and sound” manner, and had thus “violated its obligation to conduct tailored, periodic risk assessments and due diligence refreshes of Binance and Paxos-issued BUSD customers to prevent bad actors from using the platform.”
In response, NYDFS instructed Paxos to stop minting BUSD due to concerns about its relationship with Binance. Paxos agreed to stop minting new BUSD tokens but stated in a press release issued Monday that all BUSD tokens it had issued were fully backed by U.S. dollar-denominated reserves.
Paxos' regulatory concerns are far from over, as the New York Department of Financial Services (NYDFS) investigation continues. On Sunday, reports emerged that the U.S. Securities and Exchange Commission (SEC) was planning to take legal action against Paxos for issuing BUSD as an unregistered security.
Additionally, rumours have circulated that the U.S. Office of the Comptroller of the Currency (OCC), a federal bank regulator, may request that Paxos withdraw its application for a full banking charter, despite the company having received a provisional bank charter from the OCC in 2021. Paxos has denied these rumors.
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