Hong Kong CNN  — 

New York’s top financial regulator has ordered a crypto company to stop minting a major stablecoin, widening a clampdown on the embattled digital assets sector.

Paxos, a blockchain company, announced Monday that it had been instructed by the New York State Department of Financial Services (NYDFS) to stop issuing BUSD, a Binance-branded stablecoin pegged to the US dollar.

The firm said in a statement that it would stop issuing the token on February 21. The ones already circulating “have and always will be” backed one-to-one with US dollar reserves, it added.

Paxos has told customers they will be able to redeem their BUSD through February 2024, with options to redeem funds in US dollars or to convert their tokens to Pax Dollar, another stablecoin issued by the company.

Paxos also said it would “end its relationship” with Binance, the world’s largest crypto exchange. It did not give detail on why the regulator had ordered it to stop issuing BUSD.

In a statement, the NYDFS told CNN the order was “a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance.”

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

BUSD is one of the world’s most popular stablecoins, with a circulation of 15.8 billion tokens, according to CoinMarketCap.

Stablecoins are digital currencies that are designed to hold steady. They’re usually pegged to real-world assets such as gold or the US dollar.

In a statement to CNN, Binance stressed that, although its name appeared on the coin, “BUSD is a stablecoin wholly owned and managed by Paxos.”

“Binance licenses its brand to Paxos for use with BUSD, which is entirely owned by Paxos and regulated” by New York authorities, the exchange said.

Investors rattled

The BUSD news has unsettled investors. Binance suffered one of its worst-ever days in terms of withdrawals on Monday, with $873 million in net outflows, according to data provider Nansen.

“Clearly there’s a number of traders and investors moving to take their funds off the exchange,” Andrew Thurman, Nansen’s content lead, told CNN.

He noted that Binance had seen worse days. In December, a deluge of bad press caused investor jitters, sparking outflows of as much as $3 billion.

This time, “investors are still trying to digest the news,” Thurman added.

“We’re seeing some indecision from the market trying to decide if this is a case of agencies going after one bad instance of a stablecoin, or trying to shut stablecoins down entirely.”

In its statement, Binance warned that the move to stop minting BUSD would hurt users and “only decrease” the token’s market capitalization over time.

“Stablecoins are a critical safety net for investors seeking refuge from volatile markets, and limiting their access would directly harm millions of people across the globe,” the firm said.

Martin Lee, a data journalist for Nansen, told CNN that Binance had few options to counter the ban.

“Over time, the supply will drop as redemptions happen,” he said.

But “in terms of confidence in the exchange as a whole,” Binance will likely retain users as long as customer deposits continue to be protected and users can still convert BUSD to other stablecoins, Lee added.

Regulatory squeeze

Starting last year, the digital financial assets sector has been weathering a so-called “crypto winter,” sparked by the collapse of TerraUSD, an algorithmic stablecoin, in May.

Then FTX, one of the world’s biggest crypto exchanges at the time, went bankrupt in November, deepening the crisis in the industry.

As a result, digital asset companies are facing tighter regulatory scrutiny around the world.

Last week, the US Securities and Exchange Commission said overseeing crypto assets was a key priority for 2023.

The SEC also reached a $30 million settlement with cryptocurrency platform Kraken last Thursday. The agreement will force the company to unwind a program offering investment returns to US users who committed their digital assets to the company.

That practice, known as “staking,” reflected an unregistered offer and sale of securities, the SEC alleged in a complaint.

Hong Kong has also announced plans for new regulations. The city, which hopes to become a virtual assets hub, announced plans last month to adopt new rules for stablecoins, including licensing requirements for businesses.

According to crypto advocates, the growing global clampdown could undermine the ecosystem for digital assets.

— CNN’s Brian Fung contributed to this report.