BUSD Peg Buckles Under SEC Pressure – BNB Drops 5%

• Binance USD (BUSD) depegged from its $1 value on Monday, February 13th.
• The New York State Department of Financial Services has instructed Paxos, Binance’s stablecoin partner, to stop producing new BUSD.
• Binance users have begun to migrate to other stablecoins, leading to a decrease in BUSD’s market capitalization.

Binance USD Depegs, Binance Coin Sees a Drop

On Monday, February 13th, Binance USD (BUSD) fell to $0.9950. This drop in value comes amid increased regulatory scrutiny of the digital asset industry following a major market correction and the bankruptcy of the FTX exchange. 

BUSD, which holds a market capitalization of $16 billion, is the third-largest stablecoin, and seventh-largest crypto by market cap, according to CoinMarketCap. The stablecoin plays a key role in the Binance ecosystem and the wider cryptocurrency sector.

The depeg of BUSD has affected the value of Binance Coin (BNB), the native token of Binance’s exchange, which saw a 7.5% drop in price, falling from $312 to $289. The dip in BNB’s value stems from the U.S. Securities and Exchange Commission (SEC) targeting Paxos, Binance’s stablecoin partner, over concerns that BUSD may be considered a security.

BUSD Operations and Cease in Production

On the 13th of January, the New York State Department of Financial Services instructed Paxos to stop producing new BUSD. 

Following the instruction, Binance stated that the cessation of the stablecoin’s production would lead to a decrease in its market capitalization over time. All existing BUSD tokens will remain fully backed and redeemable through Paxos Trust Company until at least February 2024, Paxos said.

In the aftermath, Binance CEO Changpeng “CZ” Zhao has affirmed that users have begun to migrate to other stablecoins. Binance intends to adjust its products, including transitioning from using BUSD as the primary trading pair. Despite these changes, Binance will continue to support BUSD.

BUSD’s market capitalization has fallen 1% since Sunday 12th, while the market capitalization of USDT increased to $68.58 billion on February 13th. Circle’s USD Coin (USDC) market capitalization remains unchanged, indicating that conversions are primarily being made in USDT.

Is BUSD a security?

The SEC’s categorization of BUSD as a security sparked controversy; some have argued that the Howey Test does not apply to stablecoins. The Howey Test is a set of criteria used by the SEC to determine if an asset qualifies as a security and whether it should be regulated as such.

According to Adam Cochran, a partner at Cinneamhain Ventures, the Securities and Exchange Commission (SEC) has the authority to sue any company that issues financial assets under the Securities Act of 1933. Cochran’s statement references the recent debate surrounding the SEC’s categorization of BUSD as a security.

Cochran explains that the Howey Test doesn’t restrict the SEC and that these assets hold underlying Treasuries. This makes them similar to a money market fund, exposing holders to a security, even if they don’t earn from it.

On the Flipside

• Binance’s migration to other stablecoins has not been quantified or confirmed by an official source.
• The SEC’s categorization of BUSD as a security has not yet been determined and is currently being discussed.

Why You Should Care

The depeg of BUSD and subsequent drop in BNB’s value highlights the increased regulatory scrutiny of the digital asset industry and its potential impact on the stability of stablecoins. The SEC’s categorization of a stablecoin as a security sets a worrying precedent for potential future lawsuits.

Read more about the NYDFS investigation with Paxos below:
New York Regulators Launch Investigation into Stablecoin Issuer Paxos

Recent news about Binance is covered in:
Binance to Cease US Dollar Transfers for Non-US Customers