How Paxos-Issued BUSD’s Regulatory Troubles in the U.S. Affect the Stablecoin Market
As stablecoin issuer Paxos anxiously waits to deal with the alleged investigations by U.S. regulators of how it administered fiat-backed stablecoin Binance USD ($BUSD), crypto analysts are trying to gauge the potential impact will on the stablecoin market and the crypto space in general.
Yesterday, Paxos announced that it will “end its relationship with Binance for the branded stablecoin BUSD.” Effective 21 February 2023, Paxos will “cease issuance of new BUSD tokens as directed by and working in close coordination with the New York Department of Financial Services (NYDFS)”. Paxos Trust, which is “a regulated institution overseen by the NYDFS and audited by a top-four accounting firm,” will “continue to manage BUSD dollar reserves.”
Paxos went on to say that “all BUSD tokens issued by Paxos Trust have and always will be backed 1:1 with US dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts.” It also mentioned that “BUSD reserves are fully-backed.”
According to Paxos, BUSD will “remain fully supported by Paxos and redeemable to onboarded customers through at least February 2024, with new and existing Paxos customers able to “redeem their funds in US dollars or convert their BUSD tokens to Pax Dollar (USDP), a regulated US dollar-backed stablecoin also issued by Paxos Trust.”
On the same day, Clara Medalie, Director of Research at Kaiko gave an interview to Bloomberg’s TV Caroline Hyde and Ed Ludlow, during which she commented on this story.
According to Medalie, BUSD is mostly used on Binance and its blockchain, Binance Smart Chain, which doesn’t have much use on other cryptocurrency exchanges. This is why she believes that the New York Department of Financial Services (NYDFS) ordering Paxos to stop minting new BUSD tokens should be seen as an attack on Binance and not stablecoins as a whole.
Medalie noted that Binance had made a significant marketing push to increase the use of BUSD and that currently 35% of the total trade volume on Binance is denominated in BUSD, up from 20% at the start of the year. She also mentioned that stablecoins are very useful within DeFi ecosystems and that is why Binance was incentivized to have its own stablecoin.
However, as a result of the actions of the NYDFS, Binance no longer has this lever of growth, leaving Tether ($USDT) as the dominant stablecoin. Tether currently accounts for the vast majority of all trading activity in crypto. Medalie pointed out that BUSD was a nice counterweight to Tether’s influence, but now that BUSD is no longer available, all the risk is unfortunately concentrated in a single centralized entity, which is never a good thing.
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