Stablecoin BUSD (Binance USD) is being canceled. According to the above press release, effective February 21, Paxos will cease issuance of new BUSD tokens as directed by the New York Department of Financial Services (NYDFS). Paxos will continue to manage BUSD dollar reserves. In other words, Paxos can no longer issue new BUSDs but existing BUSDs can be redeemed and the supplies of BUSD can only decrease over time.
Paxos seems legit and fully compliant and that’s why Binance worked with them to gain legitimacy of their stablecoins. But there's definitely some shenanigans happening on the Binance side. About a month ago, Bloomberg published an article about BUSD being under collateralized on the BNB chain. What happened was that BUSD was fully backed and compliant on the Ethereum chain. But on the BNB chain, there’s this thing called Binance-pegged BUSD which was backed by the BUSD stored in the bridge contract on Ethereum. They are supposedly to be backed 1-to-1. But apparently, the BUSD balances on Ethereum were lower than the total Binance-pegged BUSD circulation on the BNB chain at times. If all the Binance-pegged BUSDs were bridged over from BNB to Ethereum, the bridge contract will run out of BUSDs. This was super shady. Guess who has the authority to mint Binance-pegged BUSD on the BNB Chain? Binance that is. Guess where people actually use BUSD stablecoins? BNB chain that is. It turns out users are not using BUSDs but Binance-pegged BUSDs. If they are fully backed 1-to-1 at all times, that would not be an issue. This is actually how it works for many tokens across chains such as USDC between Ethereum and Avalanche and USDC between Ethereum and Polygon. I suppose most users assume this is also how it works for BUSD between Ethereum and BNB but users have been duped.
If I were NYDFS, I would be super pissed. This is a scheme to use Paxos as a front to issue legitimate 1-to-1 backed stablecoins on Ethereum and then mint Binance-pegged BUSD that is fractional reserved on a different chain.
Furthermore, BUSD stablecoins had an outstanding circulation of ~16B. 16B is already pretty high. If the circulation grows another 10X, it will start to be a pretty big headache for regulators to manage. It could become too big to fail. I am not surprised that BUSD got banned but I am disgusted by how shady Binance is by confusing users with the pegged version of BUSD stablecoins.