Stablecoin Pull Out Over New Laws
Binance USD (BUSD) is a stablecoin issued by Paxos Trust Company that is pegged to the US dollar, meaning that its value remains stable and is not subject to the same volatility as cryptocurrencies. However, recent regulatory scrutiny from the US Securities and Exchange Commission (SEC) has caused concerns for BUSD’s investors and users.
On February 13, 2022, Paxos announced that the SEC had informed the company that BUSD should have been registered as a security, and the regulator was considering taking action against the platform. This caused a significant decline in the market cap of BUSD, which fell from $16.1 billion to $10.5 billion on that day, according to market tracker CoinGecko.
Moreover, the New York Department of Financial Services (NYDFS) ordered Paxos to stop creating the token, citing its failure to conduct periodic risk assessments and due diligence checks on Binance and BUSD customers. The NYDFS’s decision resulted in a loss of confidence in BUSD’s safety and security, leading to around $6 billion of outflows from the token, according to blockchain analytics firm Nansen.
Binance CEO Changpeng Zhao expressed concern that the regulatory crackdown would cause the market cap of BUSD to decrease over time, as the token is currently backed by US dollars held in reserve by Paxos. The loss of confidence in BUSD has also caused a setback in Binance’s efforts to gain market share from larger stablecoins, according to analysts.
The SEC’s Chair, Gary Gensler, has previously expressed his belief that some stablecoins are securities, which may have implications for BUSD and other stablecoins. The ongoing regulatory scrutiny of Binance and BUSD highlights the growing concern among regulators about the potential risks posed by stablecoins and other cryptocurrency-related products.
What is Stablecoin?
A stablecoin is a type of cryptocurrency that is designed to maintain a stable value relative to another asset, such as a national currency like the US dollar or the euro. Unlike other cryptocurrencies like Bitcoin, which can have highly volatile prices, stablecoins are intended to provide a more stable store of value and can be used as a medium of exchange or as a unit of account.
Stablecoins can be backed by a variety of assets, including fiat currencies, commodities like gold, or even other cryptocurrencies. Some stablecoins are fully collateralized, meaning that every unit of the stablecoin is backed by an equivalent amount of the underlying asset. Others are partially collateralized, meaning that they may only be backed by a fraction of the underlying asset, or they may be algorithmically stabilized, using smart contracts and other mechanisms to maintain a stable value.
Stablecoins have gained popularity in recent years as a way to provide stability in the volatile cryptocurrency market, and they are increasingly being used for a variety of purposes, including remittances, international trade, and as a store of value.