[Mark Tencaten] What Binance Dollar (BUSD) Crackdown by New York Regulation Means for Investors

by Mark Tencaten Mark Tencaten - Co-Founder and owner at NGS Group

The (NYDFS) New York State Department of Financial Services has instructed the crypto company Paxos to stop producing Binance USD (BUSD). According to Paxos, it would cease issuing fresh BUSD from February 21 and manage the current reserves in collaboration with the NYDFS. BUSD holders were reassured that the coins are completely backed and will remain usable through at least the following year.

Paxos further confirmed that the SEC is thinking about taking action because BUSD is an unregulated security. The two government actions have alarmed investors and may have wider repercussions for the cryptocurrency sector.

Consequences for cryptocurrency investors

Numerous news outlets are discussing a regulatory attack on cryptocurrencies, especially in light of the recent Binance USD news and the SEC's recent demand that Kraken stops offering staking-as-a-service. Yet, since his first address on cryptocurrency in 2021, SEC Chairman Gary Gensler has already warned that many cryptocurrency exchanges are selling unregistered securities and discussing the risks of stablecoins. It's nothing brand-new.

How does this affect the BUSD?

In essence, there won't be any more BUSD issued after February 21. Yet, according to Paxos, every BUSD in use is secured "1:1 with U.S. investment deposits." You will be capable of redeeming BUSD if you have some on hand. In fact, the NYDFS promises to keep a careful eye on Paxos to make sure this occurs. As users redeem their tokens, the number of BUSD in existence will gradually decrease. Changpeng Zhao, CEO and founder of Binance, tweeted that the "BUSD market valuation will only drop over time." According to him, Binance would stop utilizing BUSD as its primary trading combination on its platform.

How might this affect other stablecoins?

As explained by Mark Tencaten, stablecoins are digital assets whose value is tied to another commodity, such as the value of the dollar or the gold market price. They allow investors to enter and exit cryptocurrency investments quickly and earn income. The problem is that these coins are not the same as conventional money, which was demonstrated by the failure of the Terra platform and its Terra Dollar.

The third-largest stablecoin by market cap is BUSD. Tether (USDT) and Circle's USD Coin (USDC), each with a larger market share, account for more than 10% of all cryptocurrency investments. We're certainly aware of the authorities' concerns over stablecoins; it is unclear if this action is particular to Binance USD or indicative of larger problems.

To shield shareholders from the risks associated with stablecoins, U.S. officials, especially Treasury Secretary, have asked for tighter regulation. The Treasury once advocated for treating stablecoin issuers like banks and subjecting them to similar regulations. The FDIC insures against bank failure for money kept in bank accounts. On a crypto platform-held, stablecoins are not.

Stablecoins: Are they securities?

Many cryptocurrencies, according to Mark Tencaten, are securities since they qualify as "investment contracts," "When money is invested in a common venture with a realistic expectation of gains to be received from the labor of others," it states, "there is an investment contract." If a commodity is a security, the SEC controls it, and there are tight regulations regarding how it may be traded and how information may be disseminated.

According to the SEC, a variety of cryptocurrency earn-lend products fit this definition since users anticipated receiving fixed interest rates from the network's lending activity. Yet this is the first instance it has done so for a significant stablecoin. Several detractors wonder how a stablecoin, which makes no profit claims, can be referred to as security. It is difficult to tell if the SEC is worried about BUSD or all stablecoins until we read its complaint.

Conclusion

According to Mark Tencaten, be ready for further regulation and government intervention if you invest in cryptocurrencies. Without new regulations, the SEC will continue to use its existing authority, as will other organizations like the NYDFS. Long-term, more regulatory enforcement may improve the foundations of the sector. But, in the near run, it will probably result in greater volatility, especially if many current cryptocurrencies are considered securities. This might make it impossible for American traders to trade them and for cryptocurrency exchanges to operate.

The linked problem is that there is no regulation, so we cannot be certain of what transpires at some crypto platforms. Investors frequently learn about issues after it's too late because there is now very little investor confidence in crypto exchanges. For instance, FTX continued to tweet days before the platform stopped allowing withdrawals and declared bankruptcy that investor funds were secure.

Your assets may be at risk if you keep your money on any centralized exchange in case the network fails, or the account is frozen. Mark Tencaten suggests for full control over your assets, consider transferring your cryptocurrency to a non-custodial wallet. Cryptocurrency wallets need more labor and come with higher hazards because you are responsible for maintaining their security. Yet, given the current situation, it might be worth the further trouble.

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Created on Mar 13th 2023 10:54. Viewed 94 times.

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