New York regulators are investigating Paxos Trust Company, the New York-based firm behind Binance USD (BUSD) and Paxos Dollar (USDP), to strengthen consumer protection in cryptocurrency markets.

The exact motive of the investigation is unknown, with an NYDFS spokesperson declining to comment on ongoing investigations.

However, they noted that the department is working to protect consumers from risks associated with investing in cryptocurrency markets.

What is Paxos and why are New York Regulators probing it?

Paxos is an American financial technology company that has been operating since 2012, specializing in asset digitization, settlement, and custody services for global financial markets.

Paxos, which operates under a BitLicense from the NYDFS, has been one of the fastest-growing companies in the stablecoin industry.

Paxos has issued BUSD— a U.S. Dollar-collateralized stablecoin— since the firm struck a partnership with Binance in September 2019.

It is now one of the largest stablecoins in existence, with a market cap exceeding $16 billion and making it the third largest overall in its field.

Additionally, Paxos also created Paxos Dollar (USDP) which was launched back in 2018 and can boast a market cap of about $875 billion according to CoinGecko – making it the sixth largest and founder of PAX Gold (PAXG), a gold-backed Ethereum token.

However, it appears that the NYDFS is concerned that Paxos may not be adhering to all of the requirements set forth by the state’s regulatory framework.

Recently, NYDFS has been taking steps to further strengthen regulations for consumer protection. This began when Coinbase Global US settled an agreement for failing to look over suspicious customer transactions without sufficient background checks back in January 2021.

In order to better oversee these activities and ensure assets are fully backed and attested regularly by issuers within their jurisdiction, NYDFS published their own stablecoin guidance report this year.

This was done following the collapse of Terra LUNA ecosystem’s algorithmic stablecoin TerraClassicUSD during May 2022 as part of their effort to create more transparency for customers investing in cryptocurrency markets.

Crypto confusion: What’s behind NYDFS probing Paxos?

Paxos Trust Company being probed by the New York Department of Financial Services (NYDFS) has caused some confusion amongst customers and analysts alike.

The NYDFS has ordered Paxos to stop minting new Binance USD (BUSD) stablecoins, causing speculation that there may be issues between Binance and regulators.

However, Paxos has clarified that their own institution is regulated by NYDFS and audited by a top-four accounting firm; additionally, they have stated that all existing tokens will remain fully backed and redeemable until at least February 2024.

Despite the probe into its operations, no official statement from NYDFS as yet provided as to why it began investigating PAXOS in relation to the issuance of BUSD tokens.

As part of this news, Paxos will be stopping minting new BUSD tokens from February 21st and all existing tokens will remain backed until at least 2024.

This action does not impact other operations or services that Paxos offers such as their gold-backed PAXG token and USDP stablecoin.

Binance’s partnership with Paxos: Examining the impact of the NYDFS probe

In response to the situation, Binance CEO Changpeng Zhao tweeted out that there are no issues between them and regulators despite being informed about the directive by Paxos.

https://twitter.com/cz_binance/status/1625067495760560128

Currently, BUSD is ranked seventh in terms of market capitalization with a value slightly below its $1 peg at $0.998, according to CoinGecko.

The move by NYDFS comes as part of a larger effort to ensure that consumers looking at cryptocurrencies as viable investment opportunities have the necessary protections before investing into such markets – something regulators have been focusing on heavily recently – providing much needed transparency and oversight going forward.