Things don't look good for Binance lately to put it mildly. Last week, its last USD banking partner, Signature Bank decided to distance itself from crypto and stopped proceeding any USD deposits and withdrawals.
To add to that Paxos, that issues Binance's BUSD stablecoin on Ethereum has been under a SEC investigation for some time now. The latter decided to strike by filing a lawsuit that identified BUSD as a security. This forced PAXOS, which is regulated by the New York Department of Financial Services, to halt the minting of new BUSD tokens. The crypto platform noted that all existing ERC-20 BUSD are fully backed and redeemable 1:1 with US Dollars.
The issues that BUSD has been facing are not something new or unexpected. Binance issues its own BUSD in BSC that is pegged 1:1 to the Paxos issued ERC-20 BUSD. As per Bloomberg reporting the Binance pegged BUSD had been undercolletarized for more than a $1 billion during the last bull market. This situation was admitted by Binance insiders that claimed it was due to an error in their reporting.
Sensing that such news could implicate it and put it under the scope of investigations, Paxos added a disclaimer on their website that they are responsible only for the ERC-20 BUSD and have no involvement or control over the BSC BUSD. Nevertheless, this did not dissuade the SEC from going after Paxos in what has been described as an industry wide crackdown that has also affected Kraken and Coinbase.
Circle, the company behind the stablecoin USDC, was the one to alert the authorities, namely the NY State Department of Financial Services (NYDFS) about the blockchain data they had uncovered showing that Binance wasn't holding enough reserves for the tokens it had issued. This came during a time when a clash between USDC & BUSD was in full motion, as Binance auto-converted all its USDC into BUSD and removed the Circle stablecoin from its exchange. As per the latest data, Binance only had $100 million collateral for its $1.7 billion issued BUSD stablecoin at that time.
The logical conclusion right now is that Binance will be forced to phase out BUSD. US regulators are taking a hard stance against permits for regulated crypto financial platforms allowed to issue USD stablecoins. What will most probably happen is that Binance will try to propt and support BUSD for the time being before moving to another stablecoin, that will most probably be USDT (Tether). The stablecoin market will be divided between Tether and USDC. As for the hole in Binance reserves and whether it was indeed printing stablecoins out of thin air, the effects of that remain to be seen, especially in the BSC chain.
(Main image from Binance.com under fair use. Divider from Leofinance.io)
You can read the NYDFS report here.