Binance-branded BUSD stablecoin issued and managed by Paxos is to be phased out, said CZ, Binance CEO & Co-Founder. CZ made the announcement in a Twitter thread Monday 13 February 2023.
This development is considered by followers as a big blow to Binance’s promotion of BUSD in its ecosystem. Binance began automatically converting deposits of most top stablecoins, including USDT and USDC, into BUSD last year. This boosted BUSD’s market share.
Binance’s decision is due to the directive by the New York Department of Financial Services (NYDFS). According to a public alert by NYDFS, it “ordered Paxos to cease minting Paxos-issued BUSD as a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance in regard to Paxos-issued BUSD”. This news broke out shortly after it was reported Sunday that the U.S Securities and Exchange Commission (SEC) has threatened Paxos with a lawsuit. The lawsuit involves offering a security without registration with the U.S SEC. Kraken was sanctioned by the U.S SEC days ago.
Paxos plans to end its relationship with Binance and also cease issuing BUSD from 21 February. But Paxos is likely to defend itself against the U.S SEC in court.
CZ says, “BUSD is issued and redeemed by Paxos. And funds are #SAFU!”.
Though wholly owned and managed by Paxos, BUSD is a Binance-branded stablecoin.
CZ has emphasized that “BUSD is a stablecoin wholly owned and managed by Paxos”.
But being a Binance-branded stablecoin, BUSD will always understandably involve Binance. Unsurprisingly, NYDFS’s directive to Paxos is “as a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance in regard to Paxos-issued BUSD”. According to NYDFS, it is “monitoring Paxos closely to verify that the company can facilitate redemptions in an orderly fashion subject to enhanced, risk-based, compliance protocols”.
Paxos, NYDFS-regulated infrastructure company, maintained Monday that “[a]ll 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”.
If NYDFS is able to eventually “verify” that Paxos “can facilitate redemptions in an orderly fashion subject to enhanced, risk-based, compliance protocols”, will BUSD still be phased out as announced by Binance?
To be clear, BUSD is not collapsing and “funds are #SAFU”.
According to CZ, Paxos has assured Binance that “the funds are #SAFU, and fully covered by reserves in their banks, with their reserves audited many times by various audit firms already”. Paxos will continue to service the product, and manage redemptions”, CZ assured users.
Paxos has approximately $16.1 billion in cash and short-dated US Treasuries. Paxos is able to redeem tokens for customers for at least the next 12 months.
But as stated by Binance, it would be reviewing projects in jurisdictions where lack of clarity and regulatory uncertainty could do undue harm to its users. According to Binance, this is due to the ongoing regulatory uncertainty in certain markets. Without doubt, the U.S market included. Indeed, a number of innovators in the crypto industry have accused U.S regulators, particularly the SEC, of ‘regulation by enforcement’ . These innovators believe that there is lack of clarity and regulatory uncertainty in the U.S crypto space. But regulators, particularly SEC, often disagree. CZ does not agree that treating BUSD as a security is in the best interest of innovation and development in the U.S:
Impact on BUSD news on Binance ecosystem and the crypto market
First, as CZ tweeted, BUSD market cap will decrease over time. BUSD market cap has already slumped from $16.64 billion to $16.1 billion, according to Coin360 data. The drop is expected to continue throughout BUSD’s phasing-out period. Currently, there are $6 billion BUSD supplied, according to CoinGlass.
Read also: What is BNB?
Second, the development will surely impact trading volume on Binance exchange. BUSD helps maintain liquidity on Binance exchange, ensuring that trades are efficiently completed. Since the news of BUSD being phased out broke out, many BUSD users have started converting to other stablecoins, including USDT and USDC, as well as moving to fiat. About $183.8 million in stablecoins have been withdrawn from Binance since 13 February 8am London time, according to data from CryptoQuant. Besides stablecoins, up to $462 million worth of cryptoassets have been withdrawn from Binance exchange by 9pm London same day, according to a Coinglass analysis. Also, about 19% of Binance’s reserves are held in BUSD, according ato nalysis conducted using DeFiLlama data.
Third, although BUSD directly involves stablecoin funds and transactions, yesterday’s development clearly impacted on Binance ecosystem. Following the news, Binance Coin (BNB), the native token of Binance’s exchange, slumped by about 8.9% on Monday. This is BNB’s lowest since mid-January. Considering that Binance reserves currently comprise about 25% of BNB, BNB’s stability and growth is vital. At the price of about $319 Sunday 12 February, BNB dropped to as low as $285 Monday. At the time of writing, BNB is trading at about $293.
Fourth, beyond BUSD stablecoin itself, this recent development has triggered some level of FUD. This is particularly amongst users and holdlers of stablecoins: that regulators may eventually take action against all privately-issued stablecoins. For one, the U.S. SEC has considered BUSD a security. Stablecoins include Tether’s USDT and Circle’s USDC. But the SEC has not made a move on Tether and Circle so far. This imminent threat portends danger to the crypto market as stablecoins play a critical role in the market. Stablecoins help protect against crypto volatility, bridge the crypto–fiat economy, and provide liquidity.