The war on stablecoins has just begun. The New York Department of Financial Services (NYDFS) is investigating stablecoin issuer Paxos, known for issuing the Binance coin, BUSD.
Paxos Trust Company is the company behind Binance USD (BUSD). The Binance stablecoin is the third largest in the market, with a 14B market cap.
It is a blow to the stablecoin — which lost 10% of its market cap in 3 days.
The NYDFS has ordered Paxos to stop issuing the BUSD stablecoin, and the community is unhappy with that decision. The New York regulator's actions may be a result of the SEC Wells notice issued to Paxos.
This SEC notice reports that Binance USD (BUSD) is an unregistered security. According to the financial department, Paxos "violated its obligation to conduct regular and customized risk assessments."
At the moment, Paxos will continue to manage dollar conversions of the product. Likewise, they have paused all new BUSD creation.
These regulatory actions are due to the SEC's intention to speed up regulation. The commission determined that staking services did not follow securities law. The SEC's logic is that BUSD fails the Howey test. They consider it to be a security.
However, there is much more behind the whole situation.
According to a Bloomberg report, Circle, the company behind USD Coin (USDC), reportedly alerted the NYDFS about BUSD. Circle allegedly called the NYDFS to say that Binance did not have enough reserves to back BUSD.
Last year, Binance stopped supporting USDC and other stablecoins and switched to BUSD.
For now, it remains an investigation in progress. The only certainty is that Paxos will stop issuing BUSD on February 21. If you hold some BUSD, trade it for another asset.