Paxos Stops BUSD Mint after SEC Action, Binance's CZ Calms "Funds Are Safe"

Twelve hours after The Wall Street Journal (WSJ) reported that cryptocurrency firm Paxos is facing a Securities and Exchange Commission (SEC) lawsuit over violations of user protection regulations, the further events escalated quickly. The company decided to halt mint of new Binance's BUSD tokens, and the cryptocurrency exchange Chief Executive, Changpeng 'CZ' Zhao, calms clients by saying that funds are safe

SEC to Go After Paxos

The WSJ reported on Monday night that, according to people familiar with the matter, the SEC intends to file a lawsuit against Paxos, a stablecoin provider and the itBit crypto exchange operator.

New York regulators directed a crypto company to stop issuing one of the largest dollar-pegged cryptocurrencies as a government clampdown on the sector widens https://t.co/iPfHjdo2lV

The SEC was said to have sent the company's representatives a so-called Wells notice, a type of document the agency uses to inform entities of potential legal actions against them. According to the regulator, the Binance USD (BUSD) stablecoin that Paxos mints and lists bear the hallmarks of unregistered securities.

The four-year partnership between Binance and Paxos that began in 2019, has now come into question. Meanwhile, the SEC is putting pressure on the crypto industry, having cracked down on Kraken, another crypto exchange, for offering cryptocurrency staking services. The platform has agreed to pay $30 million in damages and suspend further staking.

Following the news, Paxos announced on Monday that it is suspending the mint of new BUSD tokens.

Paxos Reacts Immediately and Stops BUSD Mint

Information published on the official Paxos blog shows that the company has decided to end its partnership with Binance for the BUSD-branded stablecoin. As of 21 February 2023, the platform will suspend the issuance of new stablecoins, as the New York Department of Financial Services (NYDFS) recommended. There was a separate announcement last week that the NYDFS also wants to initiate proceedings in the Paxos case.

"Paxos Trust, a regulated institution overseen by the NYDFS and audited by a top-four accounting firm, will continue to manage BUSD dollar reserves. All BUSD tokens issued by Paxos Trust have and always will be backed 1:1 with US dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts," the company explained.

1/ This morning, Paxos announced it will halt minting new #BUSD tokens effective February 21. Read the full press release from Paxos here: https://t.co/jXZY1ak8DR

BUSD tokens already issued will continue to be backed by Paxos and exchangeable until at least February next year. New and existing customers of the company will be able to exchange their USD or BUSD funds for USDP, a Paxos-issued regulated stablecoin backed by the dollar.

Watch the recent FMLS22 panel on forex and crypto trends in 2023.

Binance CEO Reassures That 'Funds Are Safu'

Moments after Paxos published the statement, the CEO of Binance took to Twitter, where he assured users that funds belonging to them were safe. He confirmed Paxos' earlier words suggesting that the company would continue to operate the BUSD and manage redemptions.

#BUSD. A thread. 1/8In summary, BUSD is issued and redeemed by Paxos. And funds are #SAFU!

However, the market capitalization of the BUSD will shrink due to ongoing regulatory actions, and the exchange will look for solutions using stablecoins that are not based on the US dollar, CZ added.

It should be recalled that the BUSD is the main asset for many of the margin trading pairs used on Binance. If the court does indeed recognize stablecoin as a security, it will have a huge impact on the industry and force Binance to carry out significant remodelling of its product offering.

The news caused a momentary drop in the BUSD stability, with the price briefly dropping to below 0.9990. It was the strongest deviation from the $1 peg since the first half of January. However, the broad cryptocurrency market has so far not received the news negatively, with Bitcoin losing only 0.5% and moving just under $22,000.