Circle Blows Whistle on Binance Reserves to NYDFS

Circle’s Whistleblowing to NYDFS

• Circle alerted New York State Department of Financial Services (NYDFS) in an autumn 2022 complaint that Binance’s reserves were insufficient to support its tokens.
• The complaint was made prior to the United States Securities and Exchange Commission’s plans to file a lawsuit against Paxos, claiming that Binance USD was an unregistered security.
• NYDFS ordered Paxos to “cease minting” its Binance USD stablecoin following the news.

Background Information

Circle is a stablecoin issuer which discovered through blockchain data that Binance’s reserves were insufficient to support its tokens, including the BUSD stablecoin. This information was reported by Bloomberg on February 13th, 2021. Following this news, the U.S Securities and Exchange Commission planned to file a lawsuit against Paxos for issuing an unregistered security in the form of BUSD.

NYDFS Regulatory Action

In response, New York State’s Department of Financial Services issued their own regulatory action on February 13th; ordering Paxos to “cease minting” its BUSD stablecoin and reiterating requirements for tokens under their regime which must be fully backed by cash or cash equivalents.

Paxos Response

Paxos released a statement on February 13th responding to the SEC lawsuit which claimed that BUSD was not a security under federal securities laws and promised they would engage with the SEC staff on this issue if necessary. They also added that all issued BUSD is always backed 1:1 with US dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts.

Conclusion

Overall, Circle blew the whistle on inadequate reserves at Binance prior to NYDFS taking regulatory action against Paxo for issuing an unregistered security in form of BUSD stablecoin. Despite this news, Paxos promised they would engage with the SEC staff regarding this issue if necessary and ensured all issues of their coin are always backed 1:1 with US dollar-denominated reserves held in bankruptcy remote accounts