Months before the regulator ordered another stablecoin issuer to end its partnership with the trading platform, stablecoin juggernaut Circle Internet Financial Ltd. filed a complaint with the New York State Department of Financial Services last year regarding rival cryptocurrency firm Binance‘s improper handling of reserves for its own tokens.
According to a person familiar with the situation who asked to remain anonymous because of personal matters, Circle, which runs the USDC stablecoin and shares a regulator with Binance-branded stablecoin company Paxos Trust Co., alerted the watchdog last autumn to problems its team had surfaced in blockchain data that showed Binance did not store enough cryptocurrency in reserve to support tokens it had issued.
As a result of “many outstanding problems pertaining to Paxos’ management of its connection” with the exchange regarding BUSD, the stablecoin that Paxos issues under Binance’s branding, the New York regulator announced on Monday that it had ordered Paxos to discontinue its agreement with Binance. The regulator also stated that Paxos was not given permission to launch a Binance token that was intended to act as a stand-in for BUSD.
In an email, a representative for the agency stated that the NYDFS found Paxos was unable to run BUSD “safely and soundly based on significant supervisory interaction, a recent assessment, and the inability of Paxos to fix material concerns connected to Paxos-issued BUSD in a timely manner.”
“Paxos failed to address key deficiencies, requiring further Department action, ordering Paxos to cease minting Paxos-issued BUSD. The Department is monitoring Paxos closely to verify that the company can facilitate redemptions in an orderly fashion subject to enhanced, risk-based compliance protocols,” they added.
In order to make third-party coins like Bitcoin, Ether, Circle’s USDC, and Paxos’s BUSD useable on blockchains other than the ones they were designed for, including the platform’s own BNB Smart Chain, Binance mints billions of dollars worth of its own copies of those third-party coins.
These coins, often referred to as “Binance-peg” or “B-Tokens,” are frequently issued independently from the original issuer and are intended to be backed 1:1 by locked reserves of the underlying currencies.
Last month, Binance admitted that their version of BUSD, known as Binance-peg BUSD, had previously had undercollateralized reserves. As a result, it would frequently issue additional B-Tokens without first locking up the appropriate collateral in a designated wallet.
The source said that Binance occasionally had just $100 million in stored collateral to cover $1.7 billion in Binance-pegged USDC, indicating that the B-Token version of Circle’s USDC was also affected.
The exchange also acknowledged accidentally combining exchange client funds with the reserves for over half of its 94 B-Tokens. Last month, a spokesman for Binance stated that reserve funds would be transferred into their specific dedicated collateral wallets.
Last September, Binance announced a rule that forced all deposits of USDC and several other stablecoins on its exchange to be immediately converted into BUSD. This action eventually reduced Circle’s stablecoin market share. At noon on Monday in New York, USDC from Circle had about $40.9 billion in circulation, while BUSD had about $15.9 billion, according to CoinGecko.
A Binance spokesman confirmed on Monday that the exchange would stop creating new Binance-pegged BUSD as a result of the Paxos shift, but it will keep its auto-conversion policy in place. Even if reserves were not always kept “in a single, dedicated wallet in real time,” they insisted that B-Tokens have always been fully backed.