Circle Alerted NYDFS About Paxos, Told Financial Regulator BUSD Wasn't Fully Backed: Report

Paxos' fellow stablecoin issuer Circle supposedly tipped the New York Department of Financial Services (NYDFS) about Binance's mismanagement of reserves for its stablecoin BUSD, propelling the financial regulator to conduct an investigation.

Paxos, the financial and tech company specializing in blockchain, is at the center of a huge storm whipped by U.S. financial regulators over its dollar-backed stablecoin BUSD.

But, the NYDFS could have never investigated the stablecoin issuer if not for the complaint filed by the stablecoin giant Circle Internet Financial Ltd.

Circle reportedly filed to the NYDFS in the autumn of 2022, where it disclosed that Binance did not have a sufficient amount of reserves to back up its stablecoin.

The stablecoin giant supposedly uncovered this information through blockchain data, Bloomberg reported Monday, citing a person familiar with the matter as the source of the information and suggesting that Circle has a hand in the Binance-Paxos dilemma with financial regulators.

Consequently, months after the supposed complaint filed by Circle, the New York regulator ordered Paxos to cease minting and issuing the stablecoin.

The NYFDS, through its spokesman, said Monday that Paxos is unfit for operating BUSD since it was not administering the stablecoin in a "safe and sound manner" and had "violated its obligation to conduct tailored, periodic risk assessments and due diligence refreshes of Binance and Paxos-issued BUSD customers to prevent bad actors from using the platform."

In a press release, Paxos said it is working "in close coordination" with the New York regulator and will "cease issuance of new BUSD tokens" on Feb. 21 but "will continue to manage BUSD dollar reserves" through Paxos Trust.

"All BUSD tokens issued by Paxos Trust have and always will be backed 1:1 with US dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts," Paxos said.

The BUSD issuer is also being investigated by other regulators in the U.S., including the SEC and the Office of the Comptroller of the Currency (OCC), which is a federal bank regulator.

The SEC issued a Wells Notice to Paxos alleging that BUSD is unregistered security.

Moreover, the OCC is reportedly considering asking Paxos to withdraw its application for a full banking charter, which the stablecoin issuer vehemently denied.

Paxos, after receiving approval from the NYDFS, alongside Binance, launched the dollar-pegged stablecoin BUSD in 2019. The controversial stablecoin is the third-largest stablecoin in the world with over $16 billion in market capitalization, based on the latest data from CoinMarketCap.