Binance’s Stablecoin Partner Paxos Probed by New York Regulator

Yueqi Yang, Bloomberg News

The Bitcoin, Ethereum, Binance Coin, Cardano, and Polkadot logos, left to right, inside a cryptocurrency exchange in Barcelona, Spain, on Wednesday, March 9, 2022. Bitcoin dropped back below $40,000, erasing almost all the gains sparked by optimism about U.S. President Joe Biden’s executive order to put more focus on the crypto sector. Photographer: Angel Garcia/Bloomberg , Bloomberg

(Bloomberg) -- Paxos Trust Co., issuer of a Binance-branded token that ranks as the third-largest stablecoin, is being investigated in the US in the latest regulatory escalation to hit the cryptocurrency sector.

The New York State Department of Financial Services has recently begun probing Paxos, a person familiar with the matter said, asking not be identified discussing private information. The exact scope of the investigation is unclear.

Paxos, which also issues its own stablecoin called Pax Dollar, didn’t immediately respond to a request for comment. A spokesperson for the regulator said it can’t comment on ongoing investigations.

“The department is in continuous contact with regulated entities to understand vulnerabilities and risks to consumers and the institutions themselves from crypto market volatility we are experiencing,” the spokesperson said.

Reserves

Paxos is regulated by the New York State Department of Financial Services. The firm on its website stresses consumer protection and says that reserves for both of the stablecoins it issues are held wholly in cash and US Treasuries.

Stablecoins are intended to hold a set value, for example $1, and come in a variety of forms. Some are underpinned by a matching reserve of assets like cash and bonds.

Stablecoins have led to controversy because of past failures. The TerraUSD ecosystem, a stablecoin that relied on complex algorithms and trader incentives, suffered a $60 billion wipeout last year that roiled crypto markets.

Paxos, based in New York, operates Binance’s BUSD in a partnership with the world’s biggest digital-asset exchange. The token has a $16 billion market value, making it the largest stablecoin after Tether and USD Coin, according to CoinGecko. Pax Dollar — or USDP — has a market value of $859 million.

Binance Statement

“BUSD is a 1-to-1 backed stablecoin that is one of the most transparent stablecoins in existence,” Binance said in a statement, adding that it will continue to monitor the situation with respect to Paxos.

New York requires crypto service providers to obtain a BitLicense that comes with regulatory oversight. Paxos was granted a limited purpose trust company charter by the New York regulator in 2015. The firm also offers a gold-backed virtual currency and the itBit digital-asset exchange.

CoinDesk reported on the investigation into Paxos earlier.

In January, the New York State Department of Financial Services reached a $100 million settlement with Coinbase Global Inc.’s US unit over letting customers open accounts with insufficient background checks.

On Wednesday, Paxos rejected rumors that it has been denied or asked to withdraw its application for a national trust bank charter from the Office of the Comptroller of the Currency. The company received preliminary approval to operate a national trust bank in 2021.

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