Binance's native stablecoin — Binance USD (BUSD) — was the third largest stablecoin pegged to the United States dollar, minted by blockchain infrastructure platform, Paxos Trust Company, through a technology transfer agreement between the two companies.
However, on February 13, the New York Department of Financial Services ordered Paxos to stop minting any new BUSD token.
The move came just days after the US Securities and Exchange Commission issued a notice from Wells alleging that BUSD violates securities laws.
Binance CEO Changpeng Zhao even predicted that the regulatory clampdown would force several other crypto firms to move away from dollar-pegged stablecoins in the near future, and look for alternative tokens pegged to the Euro or Japanese Yen.
Zhao's comments came during a Twitter AMA (ask me anything) session in which he said that while gold is a good backup option, most people's assets are in fiat currencies. He admitted that the US dollar's dominance in international markets makes it a fiat currency, which is one of the main reasons behind the popularity of dollar-pegged stablecoins. However, regulatory action against such assets could give way to other stablecoins.
Zhao also spoke about the role of algorithmic stablecoins, many of which are largely decentralized, saying that these types of stablecoins could play a more prominent role in the crypto ecosystem in the future, but are inherently riskier than algorithmic stablecoins. fiat-backed tokens.
Algorithmic stablecoins are traditionally not guaranteed; instead, they use mathematical algorithms often tied to a tokenomic model rather than being backed by a real-world asset like the US dollar.
Most algorithmic stablecoin projects use a dual token system: a stablecoin and a volatile asset that maintains the stablecoin peg by maintaining the supply and demand system that keeps the value of the stablecoin unchanged. To mint a specific value of the stablecoin, an equal amount of either the native token or the volatile token is burned.
Following the regulatory action against BUSD, Binance turned to several altcoins, including decentralized ones, to meet its stablecoin-focused liquidity needs. From February 16 to 24, Binance minted 180 million TrueUSD (TUSD) stablecoins.
Decentralized stablecoins have a tainted past
Decentralized stablecoins were first popularized in the decentralized finance (DeFi) ecosystem with the creation of Dai (ICD) by MakerDAO. DAI maintains its binding through a smart contract system governed by a decentralized autonomous organization (DAO). Although DAI has remained true to its decentralized values, it got caught up in the recent bank contagion that led to its depeg together with the USD coin issued by Circle (USDC).
While algorithmic stablecoins hold true to the decentralized values of the crypto ecosystem, their real-life implementation has had a troubled history, especially with the collapse of the Terra ecosystem and its algorithmic stablecoin TerraUSD (UST), now called TerraClassicUSD ( USTC).
The Terra algorithmic stablecoin was once seen as the best example of how a decentralized stablecoin could make it to the mainstream. However, after its depeg and the subsequent collapse of the ecosystem, it has cast doubt on the future of such stablecoins.
Decentralized stablecoins suffered a severe setback with the Terra saga, and the reputation of such stablecoins was further tarnished by the actions of Terraform Labs co-founder Do Kwon. Kwon evaded law enforcement agencies while maintaining the debacle was not his fault, despite on-chain evidence suggesting that the untying was caused by an entity dumping more than $450 million of UST on the open market. Kwon himself supposedly controlled that entity. He was recently arrested by Montenegrin authorities.
With centralized stablecoins under regulatory scrutiny and trust in algorithmic stablecoins demolished, what does the future of a decentralized stablecoin look like? Is there a future at all?
Hassan Sheikh, co-founder of decentralized incubator platform DAO Maker, told Cointelegraph that the move to decentralized stablecoins would not be the way people might expect. Centralized exchanges are highly vertically integrated, creating chains, wallets, staking solutions, mining operations, and more.
“Any decentralized stablecoins that are adopted by exchanges are not yet on the market. It will not be DAI or similar. Market caps are not significant enough to have the necessary network effect,” Sheikh said, adding: “Exchanges are likely to fork protocols like Maker and push traction on their controlled 'decentralized' stablecoin for that capture. of value. The decentralized stablecoin on exchanges wouldn't really be decentralized, and most likely wouldn't exist yet, as majors would likely go after their own."
Speaking of BUSD's regulatory issues, Sheikh said that it was simply the first test of people's willingness to switch to a new stablecoin issued by the exchange. If tested, the market will change. Expecting a Binance version of DAI is reasonable, she added.
Sheikh also shed light on the major issues with decentralized stablecoins currently on the market. He said that most of these stablecoins are so deeply entrenched in USDC that they are barely decentralized.
Many decentralized exchange pools and decentralized stablecoins, such as DAI and Frax (FRAX), have significant collateral exposure to USDC. This is why DAI issuer MakerDAO introduced an emergency proposal to address the risks of its $3.1 billion USDC collateral exposure during the recent depeg.
If anything, “the aura of its marketing as decentralized has now been removed with recent USDC fights, which quickly eroded DAI peg. The shift to a decentralized stablecoin is too far away as the stablecoin that will be dominant does not yet exist. Exchanges back them solely for volume gains. The few BTC/DAI pairs and the like that exist are so weak in activity that the foreseeable future shows no sign of a shift to decentralized stablecoins among major liquidity partners,” Sheikh said.
Crypto exchanges are integrated with fiat-backed stablecoins
Fiat-backed stablecoins have become a lifeline in today's crypto world. In the early days of crypto exchanges, these stablecoins acted as an onboarding tool for many traders, and over the past decade, they have also become a key provider of liquidity.
“Fiat-backed stablecoins are so deeply entrenched in exchanges that expecting a giant turnaround is highly unlikely despite regulatory scrutiny.” Shiekh told Cointelgraph.
Abdul Rafay Gadit, co-founder of cryptocurrency trading platform Zignaly, told Cointelegraph that despite the recent decoupling of USDC, cryptocurrency trading platforms still prefer stablecoins pegged to the US dollar.
"I personally believe that [Tether] USDT is the best stablecoin right now, carefully pegged 1:1 and also kept away from unfair regulations. USDC was unlucky due to its ties to SVB [Silicon Valley Bank]; otherwise they run a great business,” he said.
He told Cointelegraph that centralized stablecoins are lifelines for the crypto ecosystem, and despite regulatory pressure, they will remain a dominant force.
Gadit said that exchanges could move away from the US, but the fiat-backed stablecoin will still rule:
“BUSD's action seems like victimization to me; I think it is unnecessary and totally unfair. Going forward, stablecoin issuers will try to stay away from the US, just as USDT issuer Tether operates out of Hong Kong.”
tether (USDT) continues to dominate the stablecoin market despite ongoing regulatory scrutiny against many other US dollar-pegged stablecoins. Industry insiders believe that although decentralized stablecoins look promising, their real-world implementations have been questionable. Therefore, centralized stablecoins are likely to continue to dominate the cryptocurrency market.
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