CZ Responds to Reports That Circle Reported Binance to Regulators

The Binance chief does not believe the reports.

Binance Chief Executive Officer Changpeng Zhao, fondly called CZ in the crypto space, has asserted that he does not believe a recent Bloomberg report that claims that Circle complained to regulators about Binance.

CZ made this view known in a Binance ask me anything (AMA) session hosted an hour ago on Twitter spaces. According to CZ, about 48 minutes into the AMA, it is unlikely that a professional industry peer would want to do that to another, as he believes it hurts the entire industry and Circle.

Notably, Wu Blockchain was the first to report this.

In response to Bloomberg's earlier report that Circle reported BUSD to NYDFS, CZ expressed in the AMA that he did not believe that Circle would do so, because doing so would also hurt themselves, Binance hopes to continue to cooperate with any industry partners. https://t.co/WB2gL6ljjQ

— Wu Blockchain (@WuBlockchain) February 14, 2023

In its report yesterday, citing an unidentified source, Bloomberg disclosed that stablecoin issuer Circle had filed complaints against Binance with the New York State Department of Financial Services for mismanagement of reserves for its Binance-pegged version of USD Coin (USDC). Per the report, Circle made this complaint last autumn, expressing the belief that Binance did not hold full reserves for its Binance-pegged tokens issued for use on the Binance Smart Chain (BSC). The source alleges that at one point, Binance only had $100 million in reserve to support $1.7 billion in Binance-peg USDC.

Notably, Binance has admitted to having undercollateralized reserves for its Binance-peg BUSD in the past, citing “operational delays” that it now claims to have fixed.

The report follows directives from the NYDFS to Paxos to end its partnership with Binance and cease issuance of the so-called “Binance USD.” The agency cited issues with Paxos’ “oversight of its relationship with Binance regarding Paxos-issued BUSD.” According to the NYDFS, in an email to Bloomberg, it was not satisfied that Paxos could operate BUSD in a “safe and sound manner.”

Meanwhile, Paxos still faces a potential lawsuit from the United States Securities and Exchange Commission, which claims that Paxos BUSD represents unregistered security. While crypto community members might be quick to assert that BUSD does not pass Howey’s test, it is worth noting that the SEC can make a couple of arguments to the contrary.

Financial economist Frances Coppola in a recent post, notes that the SEC could cite the inclusion of BUSD in the Binance earn program as a reason for investors to expect profit. She also mentions that Paxos makes a return on the assets backing BUSD, giving a portion of these to Binance, so the SEC could argue that Binance has a reasonable expectation of profits. Furthermore, Coppola asserts that the SEC could view the stablecoin as a note with security characteristics. In this instance, the economist says the Reves test and not Howey’s would be appropriate. Finally, she says the SEC could see BUSD as a money market mutual fund (MMMF) due to the assets backing it, a view that SEC chair Gary Gensler has expressed in the past.

Yesterday, CZ asserted that Binance would continue to support BUSD as the stablecoin gradually winds down while exploring alternatives. Notably, Paxos has assured users that it maintains a full reserve backing for the stablecoin, which will remain redeemable till 2024.

Amid the uncertainty, Binance is beginning to experience a surge in withdrawals and BUSD deposits. Prominent crypto analyst Ali Martinez sharing Dune analytics data, revealed that users had withdrawn nearly $1 billion in crypto assets from the exchange. CryptoQuant, an hour earlier, noted that about 3,500 BTC had left the exchange while users had deposited about $200 million in BUSD, likely to swap to other stablecoins.

Notably, the crypto exchange is no stranger to panic-induced bank runs or what CZ has described as stress tests. Last December, it processed up to $6 billion in withdrawals in a few days following a Reuters report of potential criminal charges from the U.S. Department of Justice.

At press time, BUSD continues to trade slightly below the dollar peg at $0.9997. Meanwhile, uncertainty continues to hang over Circle’s USD, which users have speculated could be the next target of regulators.