The stablecoin industry is facing increased scrutiny from regulators, and the latest target is Paxos. New York’s top financial regulator, the Department of Financial Services (NYDFS), is investigating Paxos for allegedly not administering its BUSD tokens in a “safe and sound” manner.
The investigation was reportedly sparked by a tip from rival stablecoin issuer Circle. According to a Bloomberg report, Circle alerted the NYDFS in the fall of 2022 that blockchain data revealed Binance did not have enough reserves to back up the BUSD tokens it had issued through Paxos.
In response to the investigation, Paxos agreed to stop minting new BUSD tokens, but said in a press release that all BUSD tokens it had issued were fully backed by U.S. dollar-denominated reserves.
Paxos’ regulatory woes don’t end there. The U.S. Securities and Exchange Commission (SEC) is reportedly planning to sue Paxos for issuing BUSD as an unregistered security. Additionally, the U.S. Office of the Comptroller of the Currency (OCC) may ask Paxos to withdraw its application for a full banking charter.
The investigation into Paxos is a reminder that regulators are taking a closer look at the stablecoin industry. Companies must ensure they are compliant with all applicable laws and regulations in order to avoid costly penalties.