In a week, the SEC, IRS and NYDFS have decided to drop a nuke on crypto. Kraken has shut down its staking as a service with a $30M fine, summoned by the IRS for user data. Most recently, the NYDFS has recently ordered Paxos, the issuer of Binance USD ($BUSD), to stop issuing the US-denominated stablecoin.
The SEC’s claim? They see $BUSD as an “unregistered security“, even though that would mean investors expect a profit when investing in $BUSD. While we don’t know what aspects of BUSD might interest the SEC, all I know is that stablecoins are not considered securities.
Paxos issues a statement immediately and hints that they “will engage with the SEC staff on this issue and are prepared to vigorously litigate if necessary.”
How did Binance react to BUSD news?
The founder and CEO of Binance, CZ, tweeted his view on this matter “BUSD is ruled as a security by the courts; it will profoundly impact how the crypto industry will develop (or not develop) in the jurisdictions where it is ruled as such.”
But how did Binance react to the $BUSD news?
According to Kaiko, liquidity for the top 8 $BUSD pairs plummeted. $BUSD started the 2nd month of 2023 with $40M while Thether ($USDT) has $65M.
We also saw a particular fund withdraw a hefty amount of BUSD from Paxos to Binance before news on SEC plans to sue BUSD was out. It looks like someone has some whispers in their ears before the announcement. Timely or coincidence?
The ramification of Paxos stopping issuing more $BUSD saw its stablecoin counterpart $USDT “grow by nearly $1 billion”, as Decrypt reports.
DeFiLlama shows us the 7-day change in stablecoin flows, with only outflows seen in $USDC and $BUSD among the top 3.
Nansen, a crypto analytics platform, also reports the latest (and final) time “Paxos issued BUSD was ten days ago on Feb 4, for $209.3M BUSD.”
Since then, 842M $BUSD was burnt by the Paxos treasury, and the total has dropped to $15.3B.
With 90% of $BUSD being held on Binance, we saw massive outflows amounting to over $1B.
Furthermore, we saw Amber group withdrawing $20.75M $USDC from Binance and deposited $14M of it to Coinbase.
On Curve’s 3Pool, which combines this deep liquidity for swapping USDT, USDC, and DAI, saw $USDC liquidity increase. In contrast, USDT liquidity decreases, showing investors looking at USDT as a “safer” alternative for storing their holdings.
Could the recent pumps in the market be a reflection of this event? A mega swap could have been the answer.
What are stablecoins anyway?
The main purposes of stablecoins are to facilitate payments, act as a store of value and a bridge from traditional finance to crypto and ultimately offer stability in the volatile nature of crypto.
For BUSD, it is categorized as a US Dollar backed stablecoin, which means for each stablecoin out there in the market, there is a 1:1 equivalent for every stablecoin created, which is held in cash.
Finally the rise of decentralized stablecoins?
With the FUD surrounding stablecoins, could decentralized stablecoins make a massive comeback in 2023?
With the global crypto market cap at $1.03T, about 13.24% constitute stablecoins. This means the top 3 stablecoins constitute ~90% of the stablecoin market cap.
While there is legroom for decentralized stablecoins to grow, we look into decentralized stablecoins poised to challenge market share.
1. $DAI by $MakerDAO
After the fall of $UST, $DAI has been the biggest decentralized stablecoin. It can be minted against most blue-chip assets, including BTC and ETH. But, one concern for $DAI is its backing, where we hear of a familiar stablecoin, $USDC, occupying most of the backing.
This means $DAI is one leg deep in the promise of $USDC not failing, and if the latter happens, $DAI will not be spared.
Another thought of notice should be on MakerDAO itself and its investments in real-world assets. They currently generate 50% of their revenue from RWA, which is something to note.
2. $FRAX by Frax
As the name suggests, $FRAX is the first fractional decentralized stablecoin. Its mechanism allows it to, on the one hand, partially stabilize algorithmically and the other half, backed by $USDC.
By utilizing Algorithmic Market Operations (AMO) to maintain $FRAX peg stability and generate revenue, FRAX grew in popularity amongst $DAI in being more regulatory resistant.
Additionally, the growing narrative for LSD and Real Yield all accrues towards FRAX. They even created $FPI, which is said to be CPI-pegged and aims to be inflation resistant.
3. $LUSD by Liquity
I have not dabbled in $LUSD before, but from what I hear, they are dubbed the most resilient decentralized stablecoin.
With their immutable codes penned down in smart contracts, they are accessible through many decentralized frontends. Additionally, $LUSD can only be minted against $ETH.
Their liquidation mechanism is handled through the stability pool, allowing users to deposit $LUSD to buy $ETH at a discount.
Honourable mentions go out to AAVE ($GHO) and Curve (crvUSD) with plans for new decentralized stablecoins yet to be released. As projects continue to build in 2023, the time for decentralized stablecoins to take over is never better, especially with regulatory factors posting a thread to stablecoins such as $USDT, $USDC and $BUSD.
A wise man once said, “Innovation drives crypto forward, but sustainability makes it stay.”
When it feels like centralization comes with certain levels of risk, anything decentralized seems like the “best way to go.” The promise of decentralized stablecoin still has huge potential web3, but for that to come to fruition, careful steps must be taken to ensure its readiness for mass adoption.
[Editor’s Note: This article does not represent financial advice. Please do your research before investing.]
Featured Image Credit: Chaindebrief