BUSD Event Recap: Is a Stablecoin a Security? Regulatory Authorities Demand Halt on Issuance? Response from Binance's Zhao Changpeng? Connection to USDC?

BUSD is reportedly under investigation by the U.S. SEC, leading to a series of events including a drop in BUSD price and BNB. Binance may potentially stop using BUSD as a primary trading pair. What exactly happened? Here is a summary of the events:

2/10: Stablecoin Issuer Paxos Under Investigation by NYDFS

According to sources cited by CoinDesk, the New York Department of Financial Services (NYDFS) is investigating stablecoin issuer Paxos. The scope of the investigation is not yet confirmed, but Paxos' stablecoins, including Pax dollar (USDP) and Binance USD (BUSD), may be the subjects of the probe. A spokesperson for Paxos did not respond to the reports.

Rumors circulated that stablecoin issuer Paxos was asked by the Office of the Comptroller of the Currency (OCC) in the United States to withdraw its banking license application, but Paxos denied this on Twitter.

2/11: PayPal Halts Stablecoin Project with Paxos as Partner

According to sources reported by Bloomberg, PayPal has halted its stablecoin project due to increased regulatory scrutiny on cryptocurrencies. Paxos was a key partner in this stablecoin project.

2/13: New York Requests Halt on Issuance, Binance May No Longer Use BUSD as Primary, Becoming a Security Concern

• Rumors suggest that the SEC is planning to sue Paxos, the issuer of BUSD, for allegedly issuing unregistered securities: The Wall Street Journal reported that the SEC has issued a Wells Notice to stablecoin issuer Paxos Trust Co., indicating potential charges for violating investor protection laws by issuing unregistered securities.
• Key Points: Explaining the Blind Spots: Why Stablecoins Might Be Viewed as Securities: Stablecoins could be seen as money market mutual funds (MMMFs). MMMFs are securities provided by companies that invest in commercial paper, certificates of deposit, treasury securities, and repurchase agreements, a tool regulated by the SEC in the U.S. Despite confusion in the community about whether "non-interest-bearing stablecoins" could constitute securities, the definition of securities is broad and not solely determined by the Howey Test for "investment contracts" or requiring a return to be considered a security.
• New York's Department of Financial Services orders Paxos to halt BUSD issuance: According to the Wall Street Journal, the New York Department of Financial Services has instructed stablecoin issuer Paxos Trust Co. to stop issuing new BUSD tokens, although BUSD redemption operations remain unaffected.
• CZ: BUSD Market Cap Will Decrease Gradually! May No Longer Use BUSD as Primary Trading Pair: Zhao Changpeng stated that if BUSD is deemed a security by the courts, it will significantly impact the entire cryptocurrency industry and the jurisdiction it operates in. Binance will continue to support BUSD, and we do not believe users will switch to other stablecoins. We will adjust our products accordingly, such as not using BUSD as the primary trading pair.
• Paxos confirms halting BUSD issuance, ensuring full redemption until at least February 2024. BUSD can also be exchanged for its stablecoin USDP. The company's other two stablecoin businesses will continue as usual.

Next Stop: Circle USDC?

BUSD has been ordered to halt issuance by the New York Department of Financial Services (NYDFS), but the specific reasons are currently unclear. Paxos' other two stablecoins have not been affected, so the exact reasons for the restriction on BUSD remain unknown.

It is worth noting that the second-largest stablecoin, USDC, is also regulated by the New York Department of Financial Services, so if the "security" factor led to the suspension of BUSD, USDC should be subject to the same scrutiny.

Otherwise, there may be other reasons for this regulation.

NYDFS Reveals Reason: Paxos Unable to Safely Manage BUSD

A spokesperson for NYDFS stated, "Paxos failed in its obligations to conduct regular risk assessments and due diligence updates on Binance and customers using BUSD to prevent bad actors from using the platform." The New York Department of Financial Services explained the ban because Paxos was not authorized to issue Binance-Peg BUSD, allowing Binance to issue 1:1 BUSD outside of Ethereum and on the Binance chain.