Crypto Investors Pull Billions Out of Binance’s Stablecoin After Regulator Crackdown

Binance co-founder and CEO Changpeng Zhao speaks during a press conference in Lisbon, Portugal, on Nov. 2, 2022. (Patricia de Melo Moreira/AFP via Getty Images)

Investors have been pulling billions out of Binance’s stablecoin after a securities regulator crackdown.

The crypto exchange’s stablecoin, Binance USD (BUSD), has witnessed a massive outflow of $6 billion in cash by investors following the subjugation by the Securities and Exchange Commission (SEC) of Paxos, the company that issues the token, reported the Financial Times.

Paxos admitted on Feb. 13 that the SEC had told the company that it failed to properly register the token and that the agency would consider taking legal action against the platform for offering BUSD as an unregistered security.

Binance CEO Changpeng Zhao immediately stated that the stablecoin bearing his firm’s name was not issued by Binance and is “...not something that we created,” he said on Twitter Spaces on Feb. 14.

“We have an agreement to let [Paxos] use our brand, but that’s not something that we created,” Zhao continued.

SEC Chairman Gary Gensler has previously said that stablecoins should be registered as be securities. Gensler has also targeted other crypto exchanges, including Genesis, Gemini, and Kraken for the offer and sale of what he labels unregistered securities.

The New York Department of Financial Services (NYDFS) filed a separate action the same day against Paxos, issuing a consumer alert that it had ordered the stablecoin firm to cease creating BUSD tokens.

Crypto exchange Coinbase promptly suspended trading in BUSD, saying that it “no longer met our listing standards.”

The latest moves by U.S.-based regulatory authorities boosted the world’s most popular stablecoin, Tether’s USDT.

Heavily Traded Stablecoin Is Pulled From the Market

A NYDFS spokesperson told Reuters that Paxos violated its obligations for “tailored, periodic risk assessments” and failed to conduct due diligence checks on Binance and BUSD users to stop “bad actors from using the platform.”

Paxos announced that it agreed to stop issuing new BUSD tokens by Feb. 21 and that the tokens would be redeemable for U.S. dollars or Paxos’s own stablecoin, Pax Dollar, until at least February 2024.

However, the announcement caused worried investors to start dumping their holdings.

The value of BUSD was around $10.5 billion on Mar. 1, down from $16.1 billion since Feb. 13, according to market tracker CoinGecko.

The NYDFS’s separate campaign against BUSD represents a major setback in Binance’s efforts to boost its market share from rival stablecoins, say analysts.

Zhao said that the SEC’s decision meant that the market cap of the token would decrease over time, and he has meanwhile attempted to distance his company from the token since the crackdown.

Binance Under Serious Scrutiny by Federal Regulators

However, Binance still remains a major holder of the stablecoin, with about $13.4 billion in holdings, making up about 22 percent of its $60 billion in assets in its reserves, CoinDesk reported, citing Nansen data.

Coindesk further reported that Zhao would look to work with other stablecoin issuers and that the crypto industry will probably avoid using dollar-pegged stablecoins for now because of the recent regulatory actions.

Binance has also come under recent scrutiny after a report by Forbes alleged that crypto exchange used customer deposits for its own undisclosed purposes after a team reviewed on-chain data from Aug. 17 to early December.

These actions mirror the events that led to the downfall of FTX, when Binance reportedly transferred $1.8 billion in stablecoin collateral to hedge funds, which in turn left its investors exposed, reported Forbes.

Former FTX CEO Sam Bankman-Fried lost more than $8 billion in customer funds after allegedly misusing the crypto exchange’s deposits for operations at his own trading firm, Alameda.

“Binance does not, and has never, invested or otherwise deployed user assets without consent under the terms of specific product,” a company spokesperson told Business Insider in a statement.

“Binance holds all of its clients’ assets in segregated accounts, which are identified separately from any accounts used to hold assets belonging to Binance.”

While not technically illegal in the largely unregulated market, the shift in funds could pose concern for its investors.

Meanwhile, another report by Reuters showed that Binance had secret access to a bank account belonging to its nominally independent American partner. That account was used to send $400 million to a trading firm managed by Zhao.

Zhao and his crypto trading firm have reportedly been facing a slew of legal and regulatory probes by the SEC and the Department of Justice.

Reuters contributed to this report.