Circle, the company operating the USDC stablecoin, alerted the New York Department of Financial Services (NYDFS) to potential issues in blockchain data showing Binance did not have enough crypto in reserve to support its issued tokens, Bloomberg reported on February 13th.
It resulted in NYDFS directing Paxos, which shares a regulator with Binance, to end its relationship with the exchange over “unresolved issues.”
Paxos was unable to operate BUSD, a stablecoin it issued under Binance’s branding, “in a safe and sound manner,” according to NYDFS, who cited key deficiencies and a failure to remediate material issues in a timely manner. As a result, Paxos has been ordered to cease minting BUSD and is under close monitoring by NYDFS.
How Binance-Peg Coins Created Issues for Circle & Paxos
The exchange mints billions of dollars worth of Binance-peg or B-Tokens, which are third-party coins like Bitcoin and Ether, made usable on other blockchains through the company’s platform.
These coins are meant to be backed 1-to-1 by locked reserves. However, the firm acknowledged issues with undercollateralized reserves for BUSD last month.
These issues also affected Circle’s USDC, as the exchange only had $100 million in stored collateral to support $1.7 billion in Binance-peg USDC on one occasion.
The company admitted to mistakenly mixing reserve assets with exchange-customer funds, leading to a transfer of reserve assets into dedicated collateral wallets.
The company’s auto-conversion policy, implemented in September, automatically converted USDC and other stablecoin deposits into BUSD, decreasing Circle’s share of the stablecoin market.
The exchange will stop minting new Binance-peg BUSD due to the Paxos change but will not change its auto-conversion policy.
The firm maintains that B-Tokens have always been 100% backed and that reserves were not always visible due to not being stored “in a single, dedicated wallet in real-time.
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