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Binance launches stablecoin war, deplatforms USDC

The defenestration of USDC from Binance’s crypto exchange leaves the biggest stablecoin untouched: Tether.



Stablecoins are supposed to be boring: safe-as-houses payment tokens (well, safe as U.S. dollars, anyway) that trade one-to-one for an underlying fiat currency. But this week the industry is churning with drama.

On Monday, September 5, Binance – the world’s largest crypto exchange by volumes – shocked the stablecoin world by announcing it would deplatform three of the biggest payment tokens.

As of September 29, it will convert customers’ holdings of three stablecoins into its own, called BUSD. The exchange will no longer support trading in their spot or futures pairs, or in their use as collateral to post margin – thus removing them from the staking and lending in DeFi protocols.

Safe havens?

Stablecoin instruments are akin to money market funds in traditional finance, intended to never “break the buck” and skew away from the value of their underlying fiat.

As safe havens in the volatile world of digital assets, they have the potential to evolve into deposits, which means the exchanges or DeFi lenders that are best connected to those deposits have an edge on sourcing them.

BUSD, although issued by Binance, is operated by Paxos, a New York-regulated financial institution, which operates New York bank accounts and manages the BUSD supply and its reserves.

Binance’s BUSD is already the third-largest stablecoin by volume, with a market cap of $19.43 billion. Daily volumes in BUSD jumped on Monday to $6.5 billion, according to CoinMarketCap.

US regulated

The three stablecoins that Binance is effectively throwing off its exchange include two smaller tokens, Pax Dollar (USDP) and True USD (TUSD), as well as USD Coin (USDC) – the second-largest stablecoin, with a market cap of over $50 billion.

Giving USDC the push is what surprised many in the crypto markets. USDC is backed by Circle, a $9 billion crypto firm with investors including Accel, BlackRock, Fidelity and FTX, a crypto exchange focused on leveraged products.

Pax is also, like BUSD, regulated by the New York State Department of Financial Services, which means it can access the New York-regulated banking system. (As is another stablecoin managed by Gemini, a rival exchange.)

USDC is not formally regulated in that way, but it is informally regulated as it operates under 46 US state money-transmitter licenses. Together, all of these stablecoins operate under US regulations, one way or another.

BUSD blitz

What prompted Binance to throw USDC and two other stablecoins under the bus?

One explanation is straightforward: kill the competition. BUSD is a distant number-three to Circle’s USDC in the world of stablecoins. But Binance’s exchange is the dominant industry player, with $268 million in daily volumes. Binance is throwing its weight around, denying those flows to USDC.

It’s a bold move to take away one of the most popular tokens for Binance’s users. Binance says it is doing this to enhance liquidity and capital efficiency for its users, but it risks alienating them.

There’s no question that many stablecoin pairs are redundant, which fragments liquidity. If market makers need to play with just one pair versus USD, another versus euro (etc), then it consolidates liquidity and will lead to better pricing – in BUSD.

Tether and the art of war

But why not kick USDT, aka Tether, off Binance’s exchange too? Tether is the biggest stablecoin by far, with a market cap of $67 billion.

Maybe its size means attacking Tether head-on would be a bridge too far.

One market maker thinks Binance is attacking Tether in a subtler fashion.

Evgeny Gaevoy, the founder of Wintermute, a digital-asset market maker, tweeted his view that ending various stablecoin pairs will make it easier in some ways to use USDC: traders won’t need to convert it into BUSD or Tether on the exchange to trade perpetual swaps or other instruments, but they can still deposit USDC on the exchange. This means they can use USDC more seamlessly to access products, even if they’re denominated now in BUSD.

Such a conversion will remain necessary for Tether. And this is why Binance’s move may be actually an attack on Tether, not USDC. Eventually, the ease of applying USDC to BUSD-denominated margin will prevail over the extra step of converting USDT into BUSD.

But Binance isn’t defenetrating Tether, either. It’s too big. On the other hand, Tether is also plagued with reputational problems and market concerns about its reserve assets – which Tether’s operators consistently refuse to be credibly audited. Tether is run by shadowy people behind Bitfinex, an offshore crypto exchange, without regulation.

Tether is also a less efficient stablecoin, requiring a T+1 process to mint and burn tokens – a legacy of its opacity, and the refusal of the few banks that accept crypto-denominated deposits, such as Silvergate and Signature Bank, to serve Tether. Those banks are at the heart of stablecoin reserves management. They enable market makers to mint and redeem USDC and BUSD almost instantly, but won’t allow Tether deposits. And now that ease of conversion will extend to all of Binance exchange’s retail investors.

Gaevoy concludes: “It’s not USDC ‘delisiting’, it’s another big step towards Tether losing ground to US-native stablecoins.”

Risks to Binance

The move creates three risks for Binance. First is that users leave because they want USDC, Pax or Trust as their stablecoins. But, as explained above, they can still use those stablecoins to make deposits or withdrawals seamlessly into BUSD, which sooths the sting.

The second risk is that Binance now has to manage that BUSD conversion. Although this should be straightforward, it could assume market risks if one of those stablecoins undergoes a huge price action – as happened earlier this year with Terra. (Terra’s collateralization was based on algorithms, whereas USDC is meant to be collateralized by US dollars.)

The third risk is political: as mentioned, these stablecoins are essentially products of the United States. But US regulators don’t trust Binance, which has tried to wriggle out of any global regulation, and since 2020 has been forced to block US citizens as customers. US regulators will scrutinize a deal that consolidates a Binance-issued stablecoin into the market leader.

Binance will hope that its collaboration with Paxos will blunt such concerns: BUSB, if not its issuer, must comply with US laws.

According to data provider Messari, BUSD launched in 2019 as ERC-20 tokens on Ethereum – and therefore can be used to access Ethereum-based projects, using ERC-20 smart contracts. They are collateralized one-for-one by US dollars held in Paxos-owned US bank accounts (eg Silvergate and Signature).

Although reliance on the Ethereum network provides security, removing the need for third parties to manage BUSD token creation and burning, Paxos retains the power to alter those smart contracts to pause BUSD token transactions and wipe balances of frozen accounts – a compliance requirement of its New York DFS license. Paxos also publishes monthly reports detailing the US dollar reserves backing BUSD tokens.

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