The supply of BUSD stablecoin declined by 17.7 percent or approximately $2.86 billion over the past week as investors redeemed their tokens, per on-chain data.
The decline began after Paxos, a New York-based blockchain infrastructure platform that issues and manages BUSD or Binance USD, announced that it would no longer mint new BUSD starting February 21.
Financial authorities in the state of New York ordered Paxos to cease issuing BUSD last week, citing "several unresolved issues related to Paxos' oversight of its relationship with Binance" as the primary reason for the order.
BUSD is a fiat-backed stablecoin — pegged 1-to-1 against the U.S. dollar — that Paxos issues in collaboration with crypto exchange Binance. The stablecoin is related to but separate from the Binance-issued BUSD, which is not regulated by the New York Department of Financial Services.
Unlike Paxos' BUSD, which operates solely on Ethereum, Binance's version can operate beyond the network. Binance can create an analogous BUSD on a different network by taking a single Paxos-issued BUSD. It will freeze the corresponding BUSD issued by Paxos.
On-chain data showed that $290 million worth of the stablecoins were redeemed within eight hours after the announcement. On February 13, when the announcement was issued, there was $16.1 billion worth of BUSD supply, while as of February 19, the number went down to roughly $13.2 billion. Over the last 30 days, BUSD supply has decreased by 19.2 percent.
Data also showed that BUSD represented 10.7 percent of the daily global trade volume, equivalent to $7.24 billion, on February 19.
Most BUSD trading occurs on the Binance platform, with the stablecoin being commonly traded with tether (USDT). According to blockchain intelligence firm Nansen, Binance has 10.9 billion BUSD in its reserve as of Sunday. Data also showed that 5.52 percent of BUSD trading also happened with the Turkish lira.
Pax dollar (USDP), another stablecoin issued by Paxos, also saw a decrease in supply by 19.3 percent. Paxos' pax gold (PAXG) also saw an 11.3 percent decline in circulating supply over the past 30 days.
SEC may take action against Paxos
Reports said the U.S. Securities and Exchange Commission (SEC) might be preparing to take action against Paxos regarding its issuance of BUSD. Paxos admitted that the SEC had sent the company a notice regarding BUSD's status as a security. The notice suggested Paxos register BUSD offering under the securities laws.
Paxos denied that BUSD is a security, saying it "categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws."
The SEC implements the Howey test to determine whether an asset is a security or an "investment contract." One of the key criteria for an asset to be considered a security is whether its acquirer has "a reasonable expectation of profits or other financial returns derived from the efforts of others."
A partner at law firm BCLP, Renato Mariotti, said Paxos might "aggressively" litigate against the federal agency about BUSD's status as a security. However, Mariotti warned that the litigation costs would be significant for Paxos because the process could take years, and being involved in the court with the SEC would make the stablecoin "less attractive to the market."
Additionally, Mariotti said if Paxos lost to the SEC, other stablecoins would be at risk of receiving the same treatment as BUSD.
"The basis for that action will necessarily be fact-specific to the Paxos BUSD structure but will likely have wide-ranging implications for other stablecoin issuers selling coins into the U.S.," CoinShares head of product Townsend Lansing said.
If stablecoins are considered securities, they will be subjected to more stringent rules. It will most likely result in many stablecoins no longer being sold to U.S. customers or being made available on U.S.-based crypto exchanges.