 |
| By Jurica Dujmovic |
As you have probably seen in the recent coverage by my colleague Marija Matić, Binance, the world's largest cryptocurrency exchange, is now in the crosshairs of regulators.
The latest regulatory crackdown has targeted Binance USD (BUSD, Stablecoin) — the stablecoin issued by Paxos and Binance — causing almost all cryptos to trade deeply in the red.
The New York State Department of Financial Services issued a statement with few details. In it, they said their issue was with BUSD issued by Binance on the Binance chain, which is not regulated by the department, unlike Paxos' Ethereum-based version.
This is considered an "unresolved issue" between the two issuers. NYSDFS requested that Paxos halt new issuance and break ties with Binance. In response, Paxos announced that it will end its relationship with Binance, which it did earlier this week.
While there is some good news that existing BUSD tokens are fully backed and redeemable through Paxos, regulators are not done with BUSD.
Cointelegraph reports that the Securities and Exchange Commission has also issued a Wells Notice to Paxos, alleging that Binance USD is an unregistered security.
To shed some light on the situation, I spoke with Nick Ranga, senior cryptocurrency and forex analyst at AskTraders.com.
Nick said, “With many countries announcing investigations into — and warnings against — Binance, it is clear that Binance is firmly in the sights of financial regulators around the world … and has been for some time.”
According to Nick, the U.K.’s Financial Conduct Authority and Japan’s Financial Services Agency have both issued warnings against Binance. In addition, many banks across the world have temporarily suspended deposits and withdrawals at various times.
However, Binance is yet to be accused of any wrongdoing.
The recent case in the U.S. against Paxos has spooked investors, as it has been ordered to stop issuing BUSD. As a result, investors have moved into Tether (USDT, Stablecoin), rather than into decentralized stablecoins, as many commentators expected.
“Many view this case as U.S. regulators overreaching, arguing that stablecoins lack ‘the expectation of profit,’ and so can’t be classed as a security,” Nick adds.
CZ, the creator of Binance, has previously said that he welcomes increased regulatory scrutiny. To him, this is a positive sign, and he has stated Binance’s commitment to compliance.
Nevertheless, questions remain, and what happens with Binance in terms of regulation is likely to set a precedent for all other exchanges.
As with other crypto-related cases, everything hinges on if cryptocurrencies pass the Howey Test — a four-prong test used to determine whether an "investment contract" exists — and can be classed as a security. U.S. regulators certainly seem to think they do.
To cover this topic, Stefan Rust, CEO of Truflation and former CEO of Bitcoin.com, also weighed in:
“The SEC’s ruling that Binance’s flagship stablecoin BUSD is a security, and its subsequent action against its issuer Paxos, doesn’t make any sense whatsoever.” This is because as a stablecoin, no one purchases BUSD as an investment expecting its value to increase.
Paxos agrees and has argued that BUSD is not a security under current federal securities laws. It also reasserted that BUSD is always backed 1-to-1 with U.S. dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts.
Paxos’ official statement also said that it’s only BUSD that the SEC has called into question, and no other part of its business, adding it is prepared to litigate to defend itself.
Nonetheless, for now, it has ceased minting new BUSD.
To many observers, this looks like a highly political play influenced by the fact that trading volumes of USD Coin (USDC, Stablecoin) — the favored stablecoin of U.S. institutions like BlackRock (BLK),which can make or break any economy with its $10 trillion balance sheet — are dwindling in comparison to USDT and BUSD.
While USDC has a high market cap of $41 billion, in terms of volume, it is not as relevant as USDT and BUSD.
In fact, USDC’s current market cap is a massive $13 billion lower than in August, when it bowed to pressure from U.S. lawmakers to freeze out all Toronto cash users.
This has, of course, been compounded by the fact that Binance — the world’s largest cryptocurrency exchange by trading volume — froze out USDC from its platform in September. This has allowed BUSD to grow significantly in volume at the cost of USDC.
Stefan believes that it could be possible that behemoth investors in USDC like BlackRock might be keen to halt the progress of BUSD.
Indeed, the SEC and other regulators have made no secret of their intention to pin Binance’s management team for any number of reasons, including money laundering and flouting U.S. sanctions against other countries.
Some argue this has nothing to do with Binance, as it is a non-U.S. entity.
“All businesses in a capitalist, free market economy should be most concerned with how to best serve their customers,” Stefan explains. “Binance is leading the industry in this respect and it is only getting stronger as it is taking on heavyweights like the U.S. SEC. Luckily, Binance is committed to this and well-funded.”
There you have it.
Indeed, it’s hard to ignore the fact that USDC, which is favored by U.S. institutions like BlackRock, has seen a decline in trading volume compared to BUSD and USDT.
Given BlackRock's power and influence, it is not hard to imagine that they would be keen to halt the progress of BUSD. The SEC and other regulators have also made no secret of their intentions to go after Binance's management team for various reasons, which seems to add weight to Stefan's argument.
Of course, it’s important to keep in mind that this is all speculation, and there may be other unknown factors at play.
This situation with Binance and BUSD highlights the challenges that the cryptocurrency industry continues to face as it seeks to navigate an increasingly complex and uncertain regulatory landscape.
Best,
Jurica
