Circle, the issuer of the world’s second-largest stablecoin USDC, warned the New York Department of Financial Services (NYDFS) last Autumn that Binance was mismanaging its token reserves. This came to light after Bloomberg reported that USDC had alerted the NYDFS to blockchain-based signs that Binance did not hold enough crypto in its reserves to support the tokens it had issued to customers. Binance had previously acknowledged that there were times when its Binance-peg BUSD was not fully backed, with as much as $1 billion missing from its reserves. USDC also claimed that Binance had been undercollateralized by Binance at times, with only $100 million worth of actual USDC as collateral for $1.7 billion worth of Binance peg USDC.
On Monday, the NYDFS ordered Paxos to end its relationship with Binance surrounding BUSD, and Paxos will cease minting new BUSD starting February 21. BUSD holders will still have at least a year to cash out their holdings for either dollars or Pax Dollar (USDP).
The latest enforcement action against BUSD may work in Circle’s favor, as Binance will be forced to change its treatment of stablecoins sent to its platform. This is a reversal of the consequences of Binance’s play to delist a swath of stablecoins in September, including USDC. BUSD’s share of the stablecoin market had only grown in the aftermath, at the expense of USDC. With BUSD set to wind down, Binance CEO Changpeng Zhao has already confirmed that the company will make product adjustments, including moving away from BUSD.