Circle Sounded Alarm on Paxos, Told NYDFS Binance’s Stablecoin Wasn’t Fully Backed: Bloomberg

New York’s top financial regulator is investigating stablecoin issuer Paxos – and, according to a new report, it was rival stablecoin issuer Circle that sounded an alarm.

Bloomberg reported on Monday that Circle tipped off the New York Department of Financial Services (NYDFS) in the fall of 2022, complaining that blockchain data revealed Binance did not have enough reserves to back up the BUSD tokens it had issued through Paxos. Bloomberg cited a person familiar with the matter.

The revelation comes several days after CoinDesk initially reported that NYDFS was investigating Paxos.

On Monday, an NYDFS spokesman told Reuters that Paxos was not administering BUSD in a “safe and sound” manner, and had thus “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.”

NYDFS instructed Paxos to stop minting BUSD due to concerns about its relationship with Binance. Paxos agreed to stop minting new BUSD tokens, but said in a press release issued Monday that all BUSD tokens it had issued were fully backed by U.S. dollar-denominated reserves.

Paxos’ regulatory worries don’t end with NYDFS’ ongoing investigation. On Sunday, it was reported the U.S. Securities and Exchange Commission (SEC) planned to sue Paxos for issuing BUSD as an unregistered security.

It has also been reported the U.S. Office of the Comptroller of the Currency (OCC), a federal bank regulator, may ask Paxos to withdraw its application for a full banking charter. (Paxos received a provisional bank charter from the OCC in 2021.) Paxos has denied these rumors.

A representative for Circle did not immediately respond to CoinDesk’s request for comment.