Benzinga - Stablecoin issuer Circle Internet Financial Ltd. (CRYPTO: USDC) complained to the New York State Department of Financial Services (NYDFS) last year about its rival, Binance, and its mismanagement of reserves for its own tokens (CRYPTO: BUSD), according to a Bloomberg report.
What Happened: In the autumn of 2020, Circle alerted the regulator to issues that its team had discovered in blockchain data, which showed Binance was not storing enough cryptocurrency in reserve to support the tokens it issued.
The regulator recently directed Paxos to end its relationship with Binance, citing "several unresolved issues related to Paxos' oversight of its relationship" with the exchange regarding BUSD, the stablecoin Paxos issued under Binance's branding.
The New York regulator made it clear it did not oversee a token issued by Binance that is meant to serve as a proxy for BUSD, nor is Paxos approved to issue it.
A Binance spokesperson acknowledged last month the issues with its BUSD reserves stating Binance had undercollateralized reserves for its BUSD tokens.
This caused the exchange to regularly mint new B-Tokens without having locked up the corresponding collateral in a designated wallet.
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The B-Token version of Circle’s USDC was also impacted, with Binance having only $100 million in stored collateral to support $1.7 billion in Binance-peg USDC.
The exchange also admitted to mixing together reserves for almost half of its 94 B-Tokens with customer funds.
A Binance spokesperson told Bloomberg it would stop minting new Binance-peg BUSD as a result of the Paxos change, but would not change its auto-conversion policy.
Why It Matters: According to the spokesperson, Binance-peg BUSD and other B-Tokens have always been 100% backed, though reserves were not always visible due to not being stored "in a single, dedicated wallet in real-time."
A spokesperson for Circle declined to comment, while a spokesperson for Binance said that it had "been in active dialogues with the NYDFS in relation to the Binance.US relationship with Paxos, and will continue to work closely with regulators and key stakeholders as we further grow our business."
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