Bloomberg reported that Circle, the issuer of the USDC stablecoin, filed a complaint with the New York State Department of Financial Services (NYDFS) regulator about the lack of full support for Binance USD (BUSD) coin. It was announced yesterday that Paxos would stop issuing new BUSD at the direction of the NYDFS.

Circle’s complaint likely did not relate to the coin issued by Paxos on Ethereum, but rather the linked BUSD stablecoin issued by Binance on other chains.

The saga raises questions about the importance of stablecoin competition. Also, the SEC takes aim at BUSD, saying that Paxos issued a security. We explore why the SEC might perceive Paxos as less likely to fight.

The problem: the pegged BUSD stablecoin

The Circle NYDFS complaint likely did not refer to the Ethereum stablecoin for which Paxos is responsible. Binance issued pegged stablecoins using the same BUSD brand on other blockchains, which were meant to be backed one by one by Paxos-issued Ethereum BUSD. However, records show that they were not fully supported at all times in the past. Binance claimed that there was a process issue that resulted in time differences that have been fixed.

However, Paxos was only authorized by the NYDFS to issue BUSD on the Ethereum chain. There is a strong argument that Paxos should have been aware of the Binance-linked BUSD issuance on other chains. But by doing so, you would probably be legally liable. We recently explored the troublesome branding issue where linked or bridged tokens have the same branding as the parent issuer’s tokens. This also applies to BUSD and USDC, but to a lesser extent.

In a statement, the NYDFS said there were “several unresolved issues related to Paxos’ oversight of its relationship with Binance with respect to Paxos-issued BUSD.” Bloomberg cited additional comments from the NYDFS, including “Paxos failed to address key deficiencies, requiring further action by the Department.”

Reuters quotes a NYDFS spokesperson as saying that Paxos “breached its obligation to conduct regular, personalized risk assessments and due diligence updates of BUSD clients issued by Binance and Paxos to prevent bad actors from using the platform.”

As we noted yesterday, Binance controls almost 84% of the total issuance of BUSD on the Ethereum chain.

Paxos is Circle’s most credible competitor

Additionally, Paxos received a notice from Wells from the SEC alleging that the BUSD stablecoin is a security. In many ways, this is a more serious problem. Wells’ notice is only related to BUSD, not the Paxos USDP dollar, his own branded stablecoin. Just as important, Paxos is a partner of PayPal, which was planning a stablecoin that has now been frozen.

For stablecoins, fostering competition is essential to reduce the risks of systemically large digital currencies. The greater the number of regulated and competitive stablecoins, the better. In the case of stablecoin issuers that could go mainstream, Paxos is currently Circle’s most credible competitor.

The biggest stablecoin player, Tether, is offshore and not trusted by major institutions. Therefore, Tether is more likely to remain crypto-specific. For now, the competition is Circle and Paxos.

If BUSD is a security, then USDC is even more likely to be a security. After all, USDC is essentially a tokenized money market fund, where BlackRock manages the funds.

Before BlackRock began managing Circle’s reserve assets, with BNY Mellon providing custody, Paxos was the one setting the quality benchmark. Paxos set the standard to hold all assets in Treasury bonds or bank balances instead of commercial paper. It is Paxos that sets the example of transparency and promptly published attestations. Competition is good.

Paxos has responded to Wells’ notice:

“Paxos categorically disagrees with the SEC staff that BUSD is not a security under the federal securities laws. This SEC Wells Notice pertains solely to BUSD. To be clear, there are unequivocally no other accusations against Paxos. Paxos has always prioritized the security of its clients’ assets. BUSD issued by Paxos is always backed 1:1 with US dollar-denominated reserves, fully segregated and held in remote bankruptcy accounts. We will engage with SEC staff on this issue and are prepared to vigorously litigate if necessary.”

Why Paxos could be seen as a touch softer

Since the NYDFS is forcing BUSD to shut down, why is the SEC targeting it? The fact that Binance controls wallets that hold nearly 84% of all BUSD issued by Paxos could make it an attractive target. But liquidating it should be enough.

If the SEC wanted to pick a high-profile target to set a precedent that stablecoins are securities, it only has three options:

to. Market leader Tether, which is largely offshore, making it hard to reach

b. Circle, the issuer of the second largest coin, USDC, has deep pockets and its entire business is stablecoins. So you have no choice but to fight.

C. Paxos has moderately deep pockets but is a diversified company.

Stablecoins are just one plank of Paxos’s business, albeit an important one. One of its largest businesses is the itBit cryptocurrency exchange and cryptocurrency brokerage for companies like PayPal. It is working with major institutions like Schwab, Citadel Securities, and Fidelity on a new institutional EDXM exchange.

In the long term, Paxos aspires to be a major player in securities settlement. For a while, he piloted a blockchain settlement service with major institutions like Bank of America, Credit Suisse, Instinet, Societe Generale, and ABN Amro. However, the SEC’s no-action letter expired at the end of 2021 and you need the green light from the SEC to proceed.

So from an SEC perspective, if you wanted to target one of the stablecoin issuers, then Paxos seems like the softer touch.