Crypto Exchange Binance Sees Heavy Withdrawals After Paxos Suspends BUSD Issuance

In a major crackdown on one of the strongest stablecoins in the market, the New York State Department of Financial Services (NYDFS) asked Paxos to stop issuing any further Binance USD stablecoins amid regulatory concerns.

Following the news, there have been massive withdrawals on crypto exchange Binance in the last 24 hours. On Monday, February 13, the total crypto asset outflows skyrocketed to the tune of $1 billion. This was the third-largest outflow in a single day for Binance since November 24, as per data by Dune Analytics.

Furthermore, blockchain security and analytics firm PeckShield reported that the BUSD tokens witnessed significant redemptions on Monday. A total of 342 million BUSD  were burned during the last 24 hours. Of these 46 million BUSD were burnt alone at the Paxos Treasury.

The Binance spokesperson further confirmed that the crypto exchange had a sell-off with “more than $1 billion” withdrawn in a 12-hour period. However, they could manage it with ease.

The crypto exchange added: “We run a very simple business model — hold assets in custody and generate revenue from transaction fees. We take our responsibility as a custodian seriously and maintain 1:1 backing for every user asset.”

These significant outflows are the outcome of the recent regulatory action on the BUSD stablecoin. Apart from NYDFS, the SEC is also planning to sue Paxos for issuing and trading BUSD stablecoin stating that digital assets constitutes an unregistered security. The SEC has issued a Wells notice to Paxos for the possible enforcement action. No final decision on the matter has yet arrived.

Paxos has responded to SEC’s Wells notice and rejected the regulator’s claims that BUSD is a security. It added: “Paxos categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws. This SEC Wells notice pertains only to BUSD. To be clear, there are unequivocally no other allegations against Paxos. Paxos has always prioritized the safety of its customers’ assets. BUSD issued by Paxos is always backed 1:1 with US dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts. We will engage with the SEC staff on this issue and are prepared to vigorously litigate if necessary.” 

As it turns out, USDC stablecoin issuer Circle had also warned NYDFS previously that Binance doesn’t have enough crypto reserves to support the issued tokens. This included tokens such as Binance-peg Bitcoin, Ether, USDC, BUSD, and other derivative coins designed to circulate on Binance’s native network - BNB Smart Chain.

One of the sources told Bloomberg that Binance once supported $1.7 billion worth of Binance peg USDC while using only $100 million worth of actual USDC as collateral.