Binance Says Stablecoin Partner Been Told to Stop Minting BUSD | Hacker News Reader

Binance Says Stablecoin Partner Been Told to Stop Minting BUSD

bloomberg.com

69 pointsIdealeZahlen79 comments

A lot of "stable" coins have always looked a bit shakey, but as long as the music keeps playing no one has to face reality. It doesn't matter if the coins aren't backed as long as no one asked for the backing. Now with BUSD... there's nothing to do left but ask for the money back. They can't mint any more so at best there will be a net outflow, at worst people will panic and run for the exit. So this is really going to test whether Binance wants to come up with $16Bn to keep this all afloat.

Do they have a choice? The claims they've made (fully backed by cash equivalents, separated reserves safe even in bankruptcy, always available for 1:1 redemption) [1] will be considered fraud if they don't redeem all $16Bn.

1: https://www.binance.com/en/blog/ecosystem/understanding-busd...

My argument if I were Binance would be that no reasonable person would have seen these statements and believed them or took them at face value so they don’t have to abide by them.

I'm not sure "your honour, it's so obvious that we're scammers that we can tell as many lies as we like and do whatever we like with people's money" has a particularly high success rate as a legal defence...

Presumably elbigbad is thinking of cases like Tucker Carlson [1], Elon Musk [2], Sidney Powell [3], and Elon Musk again [4], all of whom have successfully defended themselves in court by claiming no reasonable person would have believed what they said.

I don't know whether such a defence would work for cryptocurrency scammers - it's certainly not the lowest risk option IMHO.

[1] https://www.businessinsider.com/fox-news-karen-mcdougal-case... [2] https://www.reuters.com/article/us-musk-lawsuit-idUSKBN1YA13... [3] https://www.theguardian.com/us-news/2021/mar/23/sidney-powel... [4] https://www.theguardian.com/technology/2023/feb/03/elon-musk...

Big difference between libel claims being ruled non-serious and "it's not crime if the people we stole from should have expected our statements to be fraudulent" though.

(And it's not exactly a low risk defence for libel and defamation either. It worked for Alex Jones until it didn't)

Like all good Ponzi schemes, they work until they don't.

The crypto exchanges have a handy benefit of being able to block withdrawals in multiple ways, including 'technical issues' or 'verification issues' etc.

Problem is at some point (I.e. when they can't print tokens out of thin air any more) they still have to convince others to put new money in and it just becomes shuffling deck chairs on the Titanic...

Binance doesn't have to come up with anything, it is a white label solution managed by Paxos.

Sort of - there are two versions of BUSD that people use interchangeably.

Paxos issues one, and Binance issues the other.

Are you sure about that, and if so, do you have any sources?

I'm almost certain that there's only BUSD [1], issued by Paxos. What would be the other version?

[1] https://etherscan.io/token/0x4Fabb145d64652a948d72533023f6E7...

Your misconception is the exact reason SEC took this action:

There are two different BUSDs, one by Paxos on the Ethereum netowrk and one is a BUSD based derivative on other chains such as BSC.

https://www.binance.com/en/blog/ecosystem/understanding-busd...

Very interesting, do you have any sources on this being the reason for SEC's actions?

As far as I understand this, this is "just" wrapping/bridging – "just" in quotation marks because that often does carry counterparty risk if not done in a trustless way.

Is the issue that Binance is acting as a secondary custodian (holding Ethereum BUSD, issuing BSC BUSD) for a Paxos-issued (holding USD, issuing Ethereum BUSD) asset, and that that activity is not regulated by the NYDFS?

I beleive the latest reports now include specification that the issue is with the Binance pegged BUSD.

>Is the issue that Binance is acting as a secondary custodian (holding Ethereum BUSD, issuing BSC BUSD) for a Paxos-issued (holding USD, issuing Ethereum BUSD) asset, and that that activity is not regulated by the NYDFS?

yes

to make matters worse, AFAIK there is also revenue share beteween the two

Does that make the $16 billion hole go away?

I think it is fair to note the ["as directed by" the New York Department of Financial Services] part of the article.

While it does seem likely that stablecoins are shakey, most financial instruments look a bit shakey. Stocks, bonds, rental houses, etc are actually all pretty unreliable looking to a new entrant. I've had to coax some friends and family into the share market and it involves making a lot of reassuring noises as they imagine their money disappearing into the den of hucksters. If this stablecoin fails, we should note that it failed after the regulators effectively required it to fail.

And, out of a feeling of obligation, the USD looks shakey. The powers that be are printing dollars like a drunken sailor, the backer of the USD is insolvent and clearly not going to pay back their debts in real terms. There is a Russia-China-Iran axis forming that would be quite happy to see the dollar become less important in world trade. This is not a recipe for success. I personally object to stable coins more because they are pegged to something that looks unreliable rather than the (presumed high) risk of the stablecoin collapsing.

I don't think 'insolvent' means what you think it means. So long as the US can service the debt it's not really insolvent.

Ah yes, the real problem with people selling assets they lie about being backed with dollars is the dollar itself.

And if it turns out they lied about keeping dollars to back the coins and actually spent them all on coke and hookers, the real blame for the failure will lie with the regulators telling them to stop

Spoken like somebody who can't do risk assesment.

> Stocks, bonds, rental houses, etc are actually all pretty unreliable looking to a new entrant

I mean .. yes, there are ways you can lose your money with these. "The value of your money may go down as well as up". It probably is reasonable for a new entrant to be extremely cautious, especially if people are marketing a "scheme" at them.

> the backer of the USD is insolvent

Objectively false.

> and clearly not going to pay back their debts in real terms.

This doesn't matter and doesn't stop people buying T-bills.

Tip for extremely cautious retail investors: https://www.investopedia.com/terms/t/tips.asp ; the nearest you'll get to "guaranteed never to lose money".

> There is a Russia-China-Iran axis forming that would be quite happy to see the dollar become less important in world trade.

And I'd like a pony. China and some also-rans aren't going to dislodge the dollar if the Euro can't, especially as two out of the three are sanctioned off world trade and the remaining one has to do most of its trade .. with the US. In dollars. And has a nonexportable currency.

I don't have a comment about the USD itself but w.r.t. major banks U.S. regulators have been very invasively auditing risky asset holdings since 2008 and turned up the heat in the past few years in the wake of the rise of fintechs and crypto. Both are major contributors to allowances for losses. U.S. regulators have a gun to the head of each major financial institution that has exposure to either and they don't take crap from them.

I don't know how people come up with the ridiculous idea that a dollar shortage somehow signals weakness as people seek substitutes.

What they fail grasp is that the participants in question have almost no dollars left to spend. They seek alternatives not because they want to get back at the dollar and screw the USA, they do it because they have no other choice. Money substitution doesn't happen for political reasons it happens because of monetary reasons. There isn't enough money.

> Paxos also assured the funds are safe, and fully covered by reserves in their banks.

Ahahahaha.

Always normal when someone has to state this.

"I have not dismembered any kindergartners and buried their body in my cellar in the past seven months."

I think Paxos is probably legit. Their stablecoin was used by Facebook in the last desperate iteration of the Libra/Diem crypto project. I would assume that a company of FB's size and ongoing legal scrutiny probably vetted Paxos's reserves pretty thoroughly. (Then again the FB crypto project was a fuck-up of the highest order right from the start, so maybe they neglected this too.)

However the Paxos-Binance stablecoin bridge business seems shady. Are the BUSD tokens created by Binance really backed by the dollars Paxos is holding? What's the chance there is a FTX-style "hidden, poorly internally labelled account" black hole where the money should be?

Call me old fashioned, but "legit" and "last desperate iteration" are two things that rarely go hand in hand.

> "The [New York] Department [of Financial Services] is monitoring Paxos closely to verify that the company can facilitate redemptions in an orderly fashion subject to enhanced, risk-based, compliance protocols," [1]

[1] “Notice Regarding Paxos-Issued BUSD” https://www.dfs.ny.gov/consumers/alerts/Paxos_and_Binance

Interesting!

Out of sheer curiosity, I've been monitoring Paxos Dollar and Paxos Gold for 6 months.

If anything, they're one of the least active, more self-centered ecosystems. Binance USD is a relatively disconnected and slow ecosystem only sub-passed by Tether.

It's easier to show than tell. So here's a tool I made to visualize what I'm talking about:

- Paxos Gold: https://getpudding.app/#/home?address=0x8e870d67f660d95d5be5...

- Paxos Dollar: https://getpudding.app/#/home?address=0x45804880de22913dafe0...

- Binance USD: https://getpudding.app/#/home?address=0x4fabb145d64652a948d7...

- Tether: https://getpudding.app/#/home?address=0xdac17f958d2ee523a220...

Hey stable coin here! Let me just take your money, deposit away securely and do that with minimum effort.

Said no company ever...

Instead they take your money, give you some coin and now have your real money and do shit with it.

And why? Because operating a company costs money and handling money costs money. And greed

Bingo!

I looked into the business of issuing a stable coin back in 2018 and found that the only way to make it work so I could cover the costs of running the business was to invest the fiat into other ventures that could offer yield. At that point though the stable coin isn’t stable.

I've always been curious about this, if you have a stable coin that's in the billions like some are, can't they just put the fiat into a bank account and live on the interest rate?

You can, now that most (all?) interest rates are significantly above zero again.

This would have been significantly harder e.g. in the Eurozone before 2020.

Yes. For example-

The Wall Street Journal "Cantor Fitzgerald helps manage $39 billion Treasury portfolio that makes up lion’s share of stablecoin’s reserves"

https://archive.md/HL307 (https://www.wsj.com/articles/wall-street-firm-oversees-billi...)

(I am NOT endorsing that company, Tether / Bitfinex, or suggesting that anybody invests in it in any way. Just agreeing that if you have a lot of money, then you might profit from it)

a $1B high-yield (3.5%) savings account yields $35,000,000. Sounds like plenty to operate what is essentially a shell company plus app for managing monopoly money :)

How much yield (return) do you need? In 2018 interest rates were still very low. Now treasuries yield much more. Of course that fluctuates, but still.

You could maybe make a stable coin work by having a progressive claw back tax on it for anyone but the bank.

I.e. after 1h the tax is 10% and down to 0 coins left.

Then there is a limit on how much outstanding coins (debt) there can be.

What does the cost structure look like? It's not the tokens, is it the KYC?

I don't understand how this could be true: can't you just charge fees for the things which require your effort? Tether, for example, charges 0.1% for every withdrawal.

Yes you can.

But smaller the profit, smaller the motivation to do it.

Bigger the profit higher the amount of other companies.

Too high of fees and people won't do it. And than upkeep costs also money.

Now you have inflation build in.

This has very little to do with stable :)

With rising interest rates it should be making plenty of money

> $16b BUSD issued, 3 month tbills ~4.6%, so $713 million run rate divvied up between Paxos and Binance, of which a decent portion probably subsidized user trading fees on the /BUSD pairs

https://twitter.com/BowTiedIguana/status/1625069835645497344

That’s exactly what they’re doing if you trust their balance sheet.

They have less than a billion in cash and the rest is t-bills and Treasury RRP.

But they don't have access to the Fed so what they are doing is operate a pseudo bank with no deposit insurance.

This is one of the things that is weird when people insist on free bank accounts at their banks.

Yes sure as a secondary bank account with little usage, sure, but as your primary account? How do you expect your bank to stay around if they don't make money from the basic product they offer? They will try to upsell you, charge hidden fees and reduce interest rates, make risky loans and investments and all sorts of things that aren't aligned with your interests.

True and you know what? They do the same thing but regulated.

And that system is old and grown and fine tuned

The level of ignorance around stablecoins in the comment section is outstanding. Paxos issues BUSD and USDP both of which are heavily regulated by the state of New York. It’s extremely transparent with regular, high quality audits. The standards of Paxos is much higher than USDC or USDT. For blockchain users, it was the only way to hold a coin that was directly backed by bank reserves.

The reasons for this move have nothing to do with lack of backing. It’s because Binance holds a lot of BUSD, which it then uses to issue Binance-Peg BUSD which is a completely different token and does not have the same degree of transparency or auditability. More seriously for regulators, the smart contract for Binance-Peg BUSD does not have a method for blacklisting accounts, unlike BUSD’s smart contract. This meant that actors on non ethereum chains could access stablecoins backed by BUSD but without the risk of being blacklisted by regulators.

Thanks for the explanation, but that is just wild.

I have now read this article, a number of other articles, and--importantly--the NYDFS statement on the matter. Every single reference stresses that regulators agree that PBUSD is separate from BUSD and is not issued by Paxos before noting that it is explicitly not regulated. I thereby do not see any evidence for this theory that the regulators are going after Paxos and forcing them to stop issuing BUSD due to Binance issuing difficult-to-track PBUSD. Further, I will argue that the premise of such an argument is flawed: Binance is itself purposefully not regulated in the United States, and so there are assuredly actors using it to trade whom United States regulators want to blacklist; the result is that merely having BUSD traded on Binance--even without the ability to withdraw it to other chains as PBUSD--already has this "risk" you are speaking about.

To quote the NYDFS press release:

“DFS has ordered Paxos to cease minting Paxos-issued BUSD as a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance in regard to Paxos-issued BUSD.”

They don’t go into details into the unresolved issues, but it’s common knowledge that Binance-Peg BUSD is used as a way to securely hold a backed stablecoin without risk of blacklisting, and that there are some questions around Binance’s management of Binance-Peg BUSD.

https://www.dfs.ny.gov/consumers/alerts/Paxos_and_Binance

https://archive.ph/s9LBH

Also see this thread:

“Crypto Firm Paxos Faces SEC Lawsuit over Binance USD Token”

https://news.ycombinator.com/item?id=34769460

Edit: Coindesk has shared the details of The Wall Street Journal’s reporting:

> “Following the news of the SEC's legal action, Binance issued a statement that it would be reviewing projects in uncertain markets where regulatory uncertainty could cause detriments to its users.

> “The NYDFS said that it had instructed Paxos to cease minting BUSD due to several unresolved issues related to Paxos’ oversight of its relationship with Binance. Paxos said it is ending its relationship with Binance for BUSD.”

> As a result, BUSD market cap will only decrease over time

Am I correct that this matches what you would expect them to say if they didn't have enough to cover the money going out?

Similar to the when Mr. Ponzi (the original) first announced that his investments were doing poorly; that he would only be returning 90 cents on the dollar, before he saw a run on the cash and decided to split town?

Maybe, but, as it stands, BUSD's market cap can't grow, because no more coins can be minted. Therefore, the market cap either stays the same (unlikely) or shrinks as people redeem their coins for dollars (and then, and this is speculation, crashes when people realize they can't even do that because the reserves are insufficient).

No. Not having any money, you want to prevent redemptions and get people to increase deposits.

Like imagine you are doing a ponzi right, you have 1b of assets and owe your customers 2b. Then with outflows this could turn into say 0.1b of assets and owing 1.1b - game over. But with inflows it could turn into 9b of assets and owing 10b. Now you just have to do a tiny bit of gambling on stocks or bonds to be solvent. Burn the books and it's like it never happened.

No, the market cap will decrease because the price will remain fixed (Paxos will still only pay 1USD per BUSD). But no new coins will be created. So as old ones are traded in, over time the cap will fall...

Any reason why wouldn't they want this stable coin to be created anymore? Moving to something else? Or is there some issue with it?

It says in the article, the NY State department of financial services ordered them to stop. So basically... they're probably in legal trouble.

Highly likely someone has evidence that their 'stablecoin' is backed by thin air rather than actual dollars, which could be considered a minor bit of large scale fraud...

This is how banks operate too

The company that mints BUSD Paxos actually is the most regulated crypto company in the US. They are a trust and have proof of reserves which is audited by a big 4 accounting firm every month.

My very amateur guess is that Paxos sees stability issues with Binance and wants to cut ties, or they are getting too much regulatory scrutiny to make it worth it and are dropping them like a bad habit.

This for sure.

Paxos got served a Wells notice, with indication enforcement action will follow.

> audited by a big 4 accounting firm every month

You say that as if it means something. Enron routinely passed audits from a Big 4 company.

It will remain stable, it just won't be minted anymore.

And Binance have not made this decision, New York state are. One more reason for no crypto company to set up in NY state but that's up to them...

(Edit, one source says it is the SEC, others say the NY regulator...)

Claiming a stable coin is a security, when it is offered specifically NOT to offer any return, seems like a stretch...

What definition of a security are you using? Neither the dictionary nor the SEC include return in their definitons.

Ummm... The "Howey test":

>The U.S. Supreme Court's Howey case and subsequent case law have found that an "investment contract" exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.[5] The so-called "Howey test" applies to any contract, scheme, or transaction, regardless of whether it has any of the characteristics of typical securities.

https://www.sec.gov/corpfin/framework-investment-contract-an...

There is no "reasonable expectation of profits" from a stable coin right? I should be able to buy it for 1USD and sell it for the same. No more. No less.

Hmm, you earn 6% APR on BUSD with Binance Earn. You'd buy 1BUSD with 1USD expecting to withdraw 1.06USD in one year.

You hold it because you have a reasonable expectation of profits.

But then the Earn program is the security right?

Just holding BUSD gains me nothing, it just sits there.

I've seen people argue that Eth is now a security IF you have 32ETH, because you can stake it (stake it yourself, not via a counterparties program) since it moved to Proof of Stake. But that's without involving a counterparty and their program and them defining the return etc, you can just do it.

No counterparty? The Eth network is the counterparty, you're buying a stake in the network, you are diluting everyone's control. And earning a reward.

One does not automatically earn a return just by staking eth. A validator with a node has to be operated which performs the validation and block proposal functions, and money is only made when those activities are performed. The eth that is deposited is not an investment - it is a bond for good and honest performance of the work. Now, there are services that perform those activities on behalf of others, and some of those arrangements could possibly be labeled as securities, but on it's own, at the base layer, participating in eth's proof of stake system is not a security.

Personally, I really dislike the idea of a decentralised counterparty but for eth I can see the argument at least. Of course, you could make the same argument about mining gold: it's a security because you are taking profit by diluting the overall global gold supply network...

But for BUSD, none of this applies: you cannot mine it, control is absolutely with Paxos, and is undiluted and the price is (in theory) fixed.

The Howey test is a test for investment contracts, not securities in general.

Securities are much broader and can even include things expected to yield a loss (such as negative yield-to-maturity bonds).

True, but there has to be some kind of limiting definition of 'non-investment security', because otherwise any business offering a 'money back guarantee' when they sell a physical product is selling an unregistered security. Hence it should be a very tall order for the SEC to attempt to label non-investment things as securities.

I am not sure that's accurate. I believe a security is MORE tightly defined than an investment contract: it had to be fungible etc. But I may be wrong and I think most of crypto already fulfils this which is why people default to Howey. I'd be happy to be corrected.

Either way, we are sort of stuck on the same core problem: What is a security?

The Howey test was made up by SCOTUS. It isn't set in stone. If someone can made a convincing case it's wrong, congress or the courts can change it.

The problem is, it is actually hard to come up with a definition that is general, simple and applies to stable coins but not to 1000s of thinks like bricks or cars or concert tickets.

That's how we ended up with Howey in the first place.

So we either have to admit stable coins aren't securities. Or we have to widen the definition a lot and suddenly the sec also have to regulate all sorts of markets they've never actually touched before.

Of course if you know such a definition, I am all ears.

I actually think cryptos state as psuedo regulated is the worst of all worlds: good actors and would be investors or users are put off by the chance of politically motivated regulator actions and rampant fraud. But that's a much wider position than "stable coins aren't securities because they don't offer a reasonable expectation of profit"...

The "stable" part in the name suggests that it does in fact offer a return as a defensive investment against the volatility inherent in other crypto assets.

If Bitcoin is going down, you sell and buy USDT instead, then two months later you trade the USDT for 20% more Bitcoin than what you started with... Measured in Bitcoin, you got a 20% return, and it was made possible by the asset-backed security in which you invested in the meantime.

Regular money market funds didn't pay anything when interest rates were negative. They are still securities.

Are dollars in your Venmo account securities?

The dollars in my Schwab account are securities because they're automatically invested in a money market fund.

I would argue that a crypto exchange is more like Schwab than Venmo, and that stablecoins provide a function similar to money market funds.

stablecoins are not automatically invested anywhere

you arent accuring any yield

But such trading based profits come out of the efforts of the trader, not the issuer of the stable coin. Money market accounts have to be securities because most of the time they do offer some yield.

If the SEC is going down this road (and I don't think they actually are - this is more aimed at the bad behavior of Binance) it means they are seriously expanding the "reasonable expectation of profits" prong of the Howey test to include assets that on their own, have no expectation of profits simply because some users of the asset could potentially gain a profit in their use. The current makeup of the judiciary is really unlikely to play along.

My first though as well. There are however 2 scenarios where it could fit the definition:

1. arbitrage. It regularly happens that stable coins trade bellow 1 USD. Traders are buying them up to then redeem them at face value. Tether even made the mistake to advertise this "risk free" opportunity when USDT was trading around 0.98-0,99 USD.

2. I believe Paxos is sharing its bond profits together with Binance, in this case it could be seen as a security because Binance is earning money based on paxos effort.

Not that I mind the comeuppances that are coming up, but I do wonder if the new generation of tulip traders could have saved a lot of trouble by labeling everything "FOR ENTERTAINMENT PURPOSES ONLY". Only then you probably run into gambling regulators, who if anything are even more suspicious of their regulatees than financial regulators.

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