Binance’s BUSD Was Once a Top Stablecoin, But Now Rendered Obsolete by Regulations

Coinbase announced it would cease to trade in BUSD stablecoins following Paxos’ announcement that it would no longer mint Binance’s stablecoin. With stablecoin wars in full swing, what happens when the world’s largest exchange, Binance, loses this important tool?

How Binance Lost its Stablecoin

It is no coincidence that when passing a certain size threshold, crypto companies want their stablecoins. For the end consumer, stablecoins effectively serve as a superior SWIFT network on a blockchain, offering near-instant settlement with ultra-low fees.

For stablecoin companies, they gain another source of revenue. This typically involves short-term lending to earn interest, minting, and redemption fees. 

This is why Binance, now at 60% market share among exchanges, picked Paxos as the go-to stablecoin issuer to boost user confidence. Paxos earned its reputation as the top regulated stablecoin issuer, gaining a BitLicense in 2015 from the New York State Department of Financial Services (NYDFS). This was the second-ever issued BitLicense, with Circle being the first for its USDC stablecoin.

In September 2019, Binance and Paxos made a deal to mint Binance USD (BUSD) stablecoins. However, under the NYDFS provision, BUSD minting only involved stablecoins on the Ethereum blockchain, not on Binance BNB/BSC Chain. 

“It is important to note that the Department authorized Paxos to issue BUSD on the Ethereum blockchain. The Department has not authorized Binance-Peg BUSD on any blockchain, and Binance-Peg BUSD is not issued by Paxos.”

NYFDS

It appears that Circle, in joint USDC stablecoin management with Coinbase, was the one that tipped off NYDFS about this breach of conditions, according to Bloomberg. Fast forward to February 3rd, and the Securities and Exchange Commission (SEC) issued a Wells notice to Paxos, alleging that BUSD is an unregistered security.

In response, Paxos made it clear they are ready to “vigorously litigate” the matter.

This was in addition to NYFDS ordering Paxos to stop minting new Binance stablecoins. BUSD was the third-largest stablecoin by market cap at the time, behind USDT and USDC. Since then, from February 13th, the BUSD market cap shrunk by 40%, from $16.14 billion to $10.66 billion.

BUSD Still in the Stablecoin Game, but for How Long?

Despite the 40% market cap shrinkage, BUSD is still the third largest stablecoin, but only because of the dominance of USDT/USDC vs. all other stablecoins. However, with no new BUSD incoming, Dai (DAI) will likely supplant BUSD’s third rank. 

This would be an illusion because, as a multi-collateralized stablecoin, DAI is backed mainly by USDC at 25%. All other stablecoins are near or below the $1 billion market cap, including Paxos’ USDP.

In the meantime, BUSDs are getting redeemed for other stablecoins. After NFYDS blocked Paxos from minting new BUSD, Binance minted $50 million worth of TrueUSD (TUSD), which has a 5x lower market cap than DAI. The BUSD redemption drain will now accelerate after Coinbase announced it would no longer support BUSD on the platform, effective on March 13th.

Both Circle and Coinbase manage their USDC stablecoin through the Center Consortium. BlackRock also manages some of USDC reserves, as Coinbase is the go-to exchange for BlackRock’s institutional clients via its Aladdin proprietary risk management platform. 

Circle itself uses BNY Mellon for USDC custody, which positions USDC in a highly institutionalized legacy environment that is unlikely to be ousted by regulatory moves. 

Algorithmic Stablecoins Back in the Game?

As BUSD’s days are numbered, Binance CEO stated that algorithmic stablecoins would make a return, as tainted as this asset was by the collapse of Terra (LUNA), which collateralized TerraUSD (UST) stablecoin.

 “I think with the current stances taken by the regulators on the U.S. Dollar-based stablecoin, the industry will probably move away to a non-U.S. Dollar-based stablecoin, back to algorithmic stablecoins.”

Binance CEO, Changpeng Zhao (“CZ”)

However, TUSD is not one of them. Binance minted $50 million in TrueUSD (TUSD) as an immediate stablecoin solution. Powered by the TrustToken platform, new TUSDs are minted automatically via smart contracts when USD is deposited in an escrow account. 

TUSD is decentralized in the sense that it uses a variety of off-chain USD reserves. Having rebranded from TrustToken to Archblock, the company also powers TrueFi, a DeFi platform that connects borrowers with lenders. As the news on Binance TUSD minting broke out, TrueFi’s TRU token jumped by 195%, having since stabilized but still up 73% over the month.

Coinciding with the TUSD spotlight, Archblock made a significant move last week. To boost users’ confidence and grow the 5th largest stablecoin, TUSD’s reserves will be verifiable by Chainlink-backed Proof of Reserve.

Chainlink is a decentralized oracle network that feeds accurate price data to on-chain dApps such as Uniswap or Aave. TUSD appears to be the middle ground between centralized stablecoin duopoly (USDT/USDC) and still-suspect algorithmic stablecoins. Confidence in anything else runs exceedingly low.

Since Paxos’ BUSD announcement, off-shore USDT increased its market cap by $2.4 billion, more than double the TUSD’s current market cap. Likewise, given USDC’s Blackrock backing, investors are confident that USDC will not receive the BUSD treatment, having increased its market cap by $1.6 billion.

Considering the FUD that Terra caused and as the first domino leading to the FTX crash, do you think the foothold of the USDT/USDC duopoly is cemented? Let us know in the comments below.

About the author

Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird’s US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.