I beleive the latest reports now include specification that the issue is with the Binance pegged BUSD.
>Is the issue that Binance is acting as a secondary custodian (holding Ethereum BUSD, issuing BSC BUSD) for a Paxos-issued (holding USD, issuing Ethereum BUSD) asset, and that that activity is not regulated by the NYDFS?
yes
to make matters worse, AFAIK there is also revenue share beteween the two
>Is the issue that Binance is acting as a secondary custodian (holding Ethereum BUSD, issuing BSC BUSD) for a Paxos-issued (holding USD, issuing Ethereum BUSD) asset, and that that activity is not regulated by the NYDFS?
yes
to make matters worse, AFAIK there is also revenue share beteween the two