Although BUSD plays an important role in the Binance ecosystem, it is issued by Paxos. Paxos announced on Feb 13 that the firm will end its relationship with Binance and stop issuing new BUSD tokens from Feb 21 at the request of the New York Department of Financial Services (NYDFS).
In a user alert issued on Monday, NYDFS said it had forced Paxos to stop minting BUSD due to “several unresolved issues related to Paxos’ oversight of its relationship with Binance”. Paxos had breached 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, an NYDFS spokesman told Reuters.
BUSD is a 1:1 USD-backed stablecoin which is used for trading on Binance, the world’s largest crypto exchange. Binance and Paxos have collaborated to launch BUSD in 2019. There are currently 6.2 million users holding BUSD, according to the information on the Binance website. Its total market cap is about 16 billion USD, making it the seventh largest cryptocurrency in the world and the third largest stablecoin, just after USDT and USDC.
Like other stablecoin, BUSD is also pegged to USD. In yesterday’s announcement, Paxos has said BUSD will remain fully supported and redeemable to onboarded customers through at least Feb 2024. On Twitter, Binance founder Changpeng Zhao said BUSD is fully owned and managed” by Paxos, the regulator’s decision only meant that BUSD market cap will only decrease over time. Zhao also affirmed that Binance will continue to support BUSD for the foreseeable future but will make product adjustments accordingly. eg, move away from using BUSD as the main pair for trading, etc.
According to analysts, while BUSD is not owned by Binance, it is still one the important key for Binace to gain market share from larger stablecoin rivals as well as attract investors.
“It is a big setback for Binance. It remains to be seen whether (and when) Binance will be able to find a U.S.-based partner for its stablecoin”, said Ivan Kachkovski, crypto and forex analyst at UBS. Experts also predicted that a lot of investors will shift to other stablecoin, especially USDT.
Stablecoins have been a profitable business in recent years. They make it easy for users to trade on crypto exchanges, however, issuers like Paxos can profit by taking users’ deposits for short-term investments to earn interest. Stablecoin is also under pressure to maintain a 1:1 ratio with USD.
The exact reason behind the ban of NYDFS is unknown. WSJ reported that the US Securities and Exchange Commission (SEC) was planning to sue Paxos, accusing BUSD of being an unregistered security. The SEC did not confirm this information.