The multiple collapses of Terra’s UST, Titan’s IRON, and Waves’ USDN are still very fresh in the minds of the crypto faithful. Despite being one of the most important blockchain innovations, stablecoins have always had to battle tests and withstand trials. They are usually guilty until declared innocent because stablecoins are tokenized fiats, meaning they have a direct interaction with traditional finance. They represent the most significant way of onboarding real money into decentralized finance, bearing the inherent risks associated with banking. In the same way, a bank bears the risk of an asset-liability mismatch either in time (liquidity) or in quality (solvency), stablecoin issuers bear the inherent risks related to the real-time quality of underlying asset(s). Are the coins backed 1:1 to the fiat they represent by real-world assets, and even so, can these assets be easily converted to cash in the event of quick and unexpected redemption claims? That is why stablecoins have always been under immense scrutiny over the years. And that has not changed.
What Is Happening With Binance’s BUSD?
News broke yesterday that the U.S. Securities and Exchange Commission (SEC) intends to sue stablecoin issuer Paxos, which is behind the Pax Dollar (USDP) and Binance USD (BUSD) tokens, over the latter stablecoin. The Wall Street Journal reported the news. Though the SEC has not publicly commented on this issue, insider sources confirm its veracity. More weight has been thrown on it since, as Paxos announced shortly after, in the early Monday hours, that it will halt minting new BUSD tokens effective in a week’s time – February 21st. However, redemption will continue for onboarded customers until February 2024. While Paxos is already under investigation by the New York Department of Financial Services for unclear irregularities, the SEC is now alleging that BUSD is unregistered security. Paxos later confirmed it received a Wells Notice from the Securities and Exchange Commission, stating that the commission is preparing to take on the firm regarding misconduct relating to the stablecoin BUSD. A Wells Notice is an official letter from the SEC that informs recipients the agency is preparing to bring a potential enforcement action against them.
Binance USD (BUSD) was launched on September 5th, 2019, by Binance in partnership with Paxos (as custodian of fiat reserves). Due to Binance’s size in the industry, BUSD quickly gained adoption and ballooned in market capitalization to $20 billion in less than 3 years. BUSD had a market cap of $16 billion at the time of writing, making it the third largest stablecoin by market cap after USDT and USDC. Binance has consistently tried to dissociate itself from the management of BUSD; however, eagle-eyed researchers found that Paxos only issues BUSD on the Ethereum blockchain while BUSD on other chains, including the BNB Chain, is managed by Binance. It has been speculated that Binance issues BUSD tokens on the BNB Chain, which are wrapped versions of Ethereum, with the company keeping custody of the actual BUSD (from Paxos) on Ethereum. Binance acknowledged last month that it had not always maintained the proper balance to back the wrapped BUSD. After Bloomberg reported issues with how the backing for BUSD on BNB Chain was displayed, Binance said, “one occasion in the past, there was a timing mismatch in backing Binance-Peg BUSD with BUSD.” The crypto exchange claimed in a blog post that while there were issues in “the publicly viewable data,” user redemptions were not affected. It is hard to tell how much circulating BUSD is handled and “re-issued” by Binance, but we know this could significantly impact the industry.
Potential Ripple Effects
Increased Scrutiny on Binance
It is expected that all arms of Binance’s businesses, especially ones with close ties with the U.S., will be in for turbulent times ahead as the SEC continues to go hard on crypto. In a rush for damage control, the Co-Founder and CEO of Binance, Chaopeng Zhao, popularly known as C.Z., tweeted that BUSD is solely owned and issued by Paxos. So Binance was not facing any direct stress, but that will do little to quell the constant direct and indirect attacks at the company.
Trying Times Ahead for Stablecoin Issuers
If Paxos’s BUSD can be tagged security, Circle’s USDC is one, and Tether’s USDT. Therefore, these other companies have to prepare to fight the SEC or take the war to the SEC themselves. The argument for stablecoins is that they fail to meet the number 3 of the Howey test criteria;
- an investment of money,
- in a common enterprise,
- with the expectation of profit and,
- to be derived from the efforts of others
Stablecoins do not promise users any expectation of profit. They are pegged 1:1 to a fiat. Therefore, stablecoin issuers need to be able to hold their forte and defend this claim. Indeed, one would have thought that Paxos had given up without a fight. Still, the company released a statement late Monday saying it disagreed with the SEC because BUSD is not a security under federal securities laws. Even if Paxos discontinues BUSD issuance, mainstays like Tether and Circle would be tougher for the SEC to deal with; nonetheless, headwinds ahead for all of them.
Adverse Effects on Adoption
As stablecoins have been the easiest and most effective way to onboard entrants in the crypto industry, their failure will, on no small scale, trigger several systemic risks that will discourage wider adoption or make it incredibly difficult. For most countries in Africa and Southern America with unstable economies and ever-fluctuating currencies, stablecoins have, so far, been cheap and easy access to more stable foreign currencies like the USD and EUR, helping them hedge against their domestic currencies. If stablecoins are taken away, this important use case will suffer and wipe out a significant niche.
As crypto investors, it is important to pay close attention to the battles between stablecoin issuers and the exchange, Binance. That is because, through adoption over time, they have layered themselves into the fabric of the industry. If either or both of them should fail, we all are in for a wild ride.
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