(Bloomberg) -- Stablecoin giant Circle Internet Financial Ltd. issued a complaint to the New York State Department of Financial Services last year about rival crypto firm Binance’s mismanagement of reserves for its own tokens, months before the regulator told another stablecoin issuer to halt its partnership with the trading platform.

Circle, which operates the USDC stablecoin and shares a regulator with Binance-branded stablecoin firm Paxos Trust Co., alerted the watchdog last autumn to issues its team had surfaced in blockchain data that showed Binance did not store enough crypto in reserve to support tokens it had issued, according to a person familiar with the matter who asked not to be named discussing private information. 

On Monday, the New York regulator said it had directed Paxos to end its relationship with Binance, citing “several unresolved issues related to Paxos’ oversight of its relationship” with the exchange in regard to BUSD, the stablecoin that Paxos issues under Binance’s branding. The regulator added in that statement that it does not oversee a token issued by Binance that’s meant to serve as a proxy of BUSD, nor is Paxos approved to issue it.

  • Read: Crypto Crackdown Puts Binance-Linked Stablecoin in Crosshairs

The NYDFS determined that Paxos was unable to operate BUSD “in a safe and sound manner based on extensive supervisory engagement, a recent examination, and failure of Paxos to remediate material issues related to Paxos-issued BUSD in a timely manner”, a spokesperson for the regulator said in an email.

“Paxos failed to address key deficiencies, requiring further Department action, ordering Paxos to cease minting Paxos-issued BUSD. The Department is monitoring Paxos closely to verify that the company can facilitate redemptions in an orderly fashion subject to enhanced, risk-based, compliance protocols,” they added. 

Circle in an emailed statement said that “as a general matter, Circle does not comment on communications with regulators.”

Binance mints billions of dollars’ worth of its own versions of third-party coins like Bitcoin, Ether, Circle’s USDC and Paxos’s BUSD to make them usable on other blockchains than the ones they were built for, such as the platform’s own BNB Smart Chain. Those coins, known as Binance-peg or B-Tokens, are supposed to be backed 1-to-1 by locked reserves of the coins they’re based on, stored separately from customer funds, and often do not involve any oversight from the original issuer.

Binance acknowledged issues with having historically undercollateralized the reserves for its version of BUSD — known as Binance-peg BUSD — last month, creating a situation where it would regularly mint new B-Tokens without having locked up the corresponding collateral first in a designated wallet. The B-Token version of Circle’s USDC was also impacted, the person said, noting that on one occasion, Binance only had $100 million in stored collateral to support $1.7 billion in Binance-peg USDC. 

The exchange also admitted to mistakenly mixing together reserves for almost half of its 94 B-Tokens with exchange-customer funds. A Binance spokesperson said last month it would transfer reserve assets into their own dedicated collateral wallets. 

  • Read: Binance Concedes User Funds Mistakenly Stored With Reserves

Binance implemented a policy last September that automatically converted any deposits of USDC and some other stablecoins on its exchange into BUSD, a move that ultimately decreased Circle’s share of the stablecoin market. Circle’s USDC had roughly $40.9 billion in circulation as of midday Monday in New York, while BUSD had around $15.9 billion, according to CoinGecko. 

“It is widely known that in September 2022, Binance announced it would convert one-to-one USDC, USDP and TUSD stablecoins to Binance’s own BUSD,” Circle said in its emailed statement. “The regulator for the capital of capital markets does not need a single company to bring to its attention a widely evidenced and reported situation.”  

The exchange will stop minting new Binance-peg BUSD as a result of the Paxos change, a Binance spokesperson said on Monday, but will not change its auto-conversion policy. They maintained that B-Tokens have always been 100% backed, adding that reserves were not always visible due to not being stored “in a single, dedicated wallet in real time.”

(Adds Circle statement.)

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