$BUSD to depeg below $1? All you need to know about the Binance, Paxos and SEC drama

Temitope Akintade
$BUSD to depeg below $1? All you need to know about the Binance, Paxos and SEC drama

The crypto community was thrown into a state of panic on Monday when news broke out that Paxos, one of the leading blockchain and tokenisation infrastructure platforms, ended its relationship with Binance regarding the issuance of the latter’s stablecoin, Binance USD ($BUSD). 

The worrying part of the whole drama is that shortly after the report, $BUSD depegged slightly. And as expected, the crypto community, which has not fully recovered from the haunting PTSD of the Terra ($UST) debacle last May, was in a state of Fear, Uncertainty and Doubt(FUD). With several unfounded claims indicating that $BUSD was headed the $UST way.

Thankfully, $BUSD is still stable, but more revelations about the issue have been revealed. In this article, we will discuss what led to the depegging, Binance’s response and what will be important as we advance.

What led to the $BUSD depeg?

It all started when the New York Department of Financial Services(NYDFS) ordered Paxos Trust Co, which issues and lists BUSD, to stop minting more of its tokens. Paxos announced that it would cease the issuance of new BUSD tokens from February 21 and end its relationship with Binance while assuring BUSD holders that every coin is backed by 1:1 with US dollar-denominated reserve. 

Although Binance said it would continue to manage redemptions of the product, panic among BUSD traders led to the decline in BUSD/USDT pair, suggesting that traders are moving money into tether.

What really happened?

Paxos reportedly received a letter from the United States Securities and Exchange Commission (SEC) indicating that the agency intends to sue the company for violating investor protection laws. This move is part of the SEC’s growing campaign in crypto enforcement as the agency intensifies its focus on major players in the crypto market.

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The SEC issued a Wells Notice to Paxos, which is used to inform a company or an individual of a possible enforcement action. According to sources, the notice alleges that BUSD is unregistered security. The specific details of the SEC notice are still unclear at the moment, as it could not be ascertained if it is related to Paxos’ issuing of the coin, the listing of the coin, or both.

According to Investopedia, after a Wells Notice is received, the accused is allowed 30 days to respond to it via a legal brief known as a Wells Submission – a chance to argue why the charges should not be brought against the prospective defendants.

However, Paxos has emphasized that all existing BUSD tokens will remain fully backed and redeemable through Paxos Trust Company until “at least February 2024.” So, customers can redeem their funds in dollars and convert their BUSD tokens to another Paxos-issued stablecoin, Pax Dollar ($USDP).

This action does not impact our ability to continue serving new or existing customers, our continued dedication to grow our staff or fund our business objectives. Paxos remains committed to becoming the global leader in the blockchain tokenization infrastructure […]”

Who blew the whistle?

According to a Bloomberg report late on Monday, it was Circle, Binance’s market rival that issues the $USDC stablecoin, who alerted the New York Department of Financial Services in an autumn 2022 complaint that Binance’s reserves were insufficient to support its tokens. Persons familiar with the matter reportedly said Circle’s team had uncovered the information through blockchain data.

Notably, the rivalry between Binance and Circle has been incubating for some time. Recall that the former implemented a policy last September that automatically converts any deposits of $USDC and some other stablecoins on its exchange into BUSD, effectively reducing Circle’s share of the general stablecoin market.

Binance’s response 

Binance CEO Changpeng has moved to assure users that funds are safe despite the intended enforcement action. In a Twitter thread on Wednesday, Zhao said Paxos would continue to service BUSD and manage redemptions. Additionally, it made assurances of its reserves, which multiple parties have audited.

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However, due to the enforcement action, the Binance boss said that the $BUSD market cap would decrease over time, and the exchange would explore non-United States dollar-based stablecoins. He also said that Binance would continue to support the stablecoin on its exchange while acknowledging that users may migrate to other stablecoin tokens due to the enforcement action. 

What next?

Binance has been experiencing record outflows over the past 24 hours following the development. Binance Coin ($BNB) experienced a massive drop in price over the past week, falling below the $300 mark

Additionally, Dune Analytics data shows that Binance saw exchange outflows of $916 million on Monday. This is the largest single-day outflow for the exchange since November 24. Most of these outflows are likely from investors rushing to reduce their exposure following regulatory scrutiny. 

Importantly, the SEC’s latest move came as yet another setback for the cryptocurrency market, which was already feeling the heat from the recent SEC action on Kraken’s crypto-staking service. 

Considering Binance’s dominance in the crypto space, restrictions or regulations on $BUSD or any of its assets would likely have a rippling effect across the entire industry. Nevertheless, we take solace in the words of CZ for now, which says, ‘all funds are #SAFU.’

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