New York’s chief financial regulator has ordered Paxos, the company behind the stablecoin of major crypto exchange Binance, to stop issuing the token, Paxos and the regulator said in separate statements on Monday.

The Binance USD (BUSD) stablecoin, one of the world’s biggest, is issued and redeemed by New York-based Paxos Trust Company, both of which are regulated by the New York department of financial services (NYDFS).

The token, which is designed to keep a steady value and is widely used by crypto traders at Binance, is backed by reserves of ordinary cash and US treasuries, based on Paxos’s website.

The NYDFS said in a statement that it ordered Paxos to stop minting BUSD “as a result of several unresolved issues related to Paxos’s oversight of its relationship with Binance through Paxos-issued BUSD”. The regulator’s statement did not give any details of what those issues were.

Binance CEO Changpeng Zhao wrote in a series of tweets earlier on Monday that the regulator’s decision meant that “BUSD market cap will only decrease over time”, adding that Paxos assured Binance the funds were fully covered by Paxos’s bank reserves.

BUSD is “wholly owned and managed by Paxos”, Zhao said.

Binance USD is the seventh largest cryptocurrency, with more than US$16-billion in circulation, according to market tracker CoinGecko. Zhao said Binance would “continue to support BUSD for the foreseeable future” and that he saw users “migrating to other stablecoins over time”.

‘Monitoring closely’

Paxos said in a statement that it would stop issuing new BUSD as of 21 February and would continue to support and redeem pre-existing BUSD until “at least February 2024”.

The NYDFS said it was “monitoring Paxos closely to verify that the company can facilitate redemptions in an orderly fashion subject to enhanced, risk-based, compliance protocols”.

The NYDFS clampdown, first reported by the Wall Street Journal, comes amid a wider crackdown on cryptocurrencies and Binance by US regulators. The justice department is investigating Binance for suspected money laundering and sanctions violations, Reuters has previously reported. Binance has previously said it regularly works with regulatory agencies to address questions they may have.

Read: Is Binance too big to fail?

The WSJ, citing unnamed sources, reported on Sunday that the US Securities and Exchange Commission has told Paxos it plans to sue the company, alleging that Binance USD is an unregistered security. The SEC did not immediately respond to a request for comment.

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“If BUSD is ruled as a security by the courts, it will have profound impacts on how the crypto industry will develop (or not develop) in the jurisdictions where it is ruled as such,” Zhao wrote on Twitter. He said he had no information on the lawsuit. — Tom Wilson, (c) 2023 Bloomberg LP