BUSD Fallout: Circle warned U.S. authorities about Binance's reserves

BUSD Fallout: Circle warned U.S. authorities about Binance’s reserves

USDC issuer Circle filed a complaint to the NYDFS regarding Binance’s mismanagement of its own reserve assets months prior to the SEC notice ordering stablecoin issuer Paxos to end its partnership with the cryptocurrency exchange. 

According to a report by Bloomberg, Last autumn, stablecoin issuer Circle lodged a complaint with the New York State Department of Financial Services (NYDFS) against crypto exchange Binance alleging that the company was misrepresenting capital reserves for its own tokens.

Binance is currently facing scrutiny from U.S. regulators regarding the status of its dollar-pegged stablecoin – BUSD. 

Circle, which operates the USDC stablecoin in partnership with Paxos Trust Co., which is also the regulator for Binance’s BUSD, warned the financial regulator after discovering on-chain data showing the company did not hold enough crypto assets in its reserves to back tokens it had issued. The assets cited were Bitcoin (BTC), Ethereum (ETH), USDC, and BUSD.

Binance’s Mismanagement Of Reserve Assets

Binance mints billions of dollars worth of the above-mentioned cryptocurrencies to make them interoperable with its own blockchain – BNB Smart Chain – as well as other networks than the one the tokens were originally minted on.

Binance's Mismanagement Of Reserve Assets

The company issues a token called Binance-peg or B-Tokens, which is supposed to be backed 1:1 by the asset that is held in its reserves.

Crypto assets locked in Binance reserves are stored separately from customer funds and are also not overseen by the network that originally issued the token. 

In December 2022, Binance acknowledged that it regularly undercollateralized BUSD reserves for Binance-pegged versions of the stablecoin.

The crypto exchange would mint new B-Tokens without locking enough BUSD as collateral in its reserve wallet. Circle raised the issue after finding out that its B-Token USDC was also affected by the same issue.

On one occasion, Binance had only $100 million USDC as collateral to support its $1.7 billion Binance-peg USDC. The company also admitted to mixing 94 B-Tokens together with customer funds and also transferring reserve assets to its own dedicated collateral wallets. 

Last September, the exchange enacted a policy that automatically converted any customer deposits in USDC, Paxos USD (USDP), and True USD (TUSD) stablecoins to Binance USD (BUSD).

The move directly impacted Circle, decreasing the market share of its stablecoin. According to Binance, only ERC-20 versions of BUSD tokens are issued by Paxos Trust Co. and regulated by the New York State Department of Financial Services (NYDFS), whereas, Binance-peg BUSD is a product of the exchange that is not issued by Paxos or regulated by federal authorities. 

On February 3, the U.S. Securities and Exchange Commission (SEC) sent a Wells Notice to Paxos regarding the issuance of BUSD tokens, alleging the dollar-pegged stablecoin was not registered as a security with the agency prior to its sale.

The NYDFS followed through on the matter on Monday by ordering the stablecoin issuer to end its relationship with Binance, citing oversight issues related to the token.

Binance's Mismanagement Of Reserve Assets

On February 13, Paxos which has been minting and managing reserves for Binance USD since 2019, released a statement announcing that it was terminating its partnership with the crypto exchange and will no longer issue new BUSD tokens from February 21, 2023.

Paxos manages nearly $16 billion worth of BUSD reserves in cash and treasury bonds, which it will continue to hold until investors have completely redeemed the tokens. 

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