Notes 2/14: BUSD Damage

BUSD is the world’s third biggest stablecoin and is used extensively at Binance – the world’s third biggest cryptocurrency exchange by trading volume. Perhaps it is a testimony to crypto’s heft (or grift) that even action by the world’s most powerful regulatory agency could not de-peg the stablecoin.

According to research firm Nansen, $2.7 billion fled from Binance between Sunday – when news of the agency’s Wells Notice to Paxos was made public – and Monday. $144 million worth of BUSD was also redeemed, the firm said. Still, the stablecoin continues to cling to its peg. Its market capitalization has declined by roughly 2% from yesterday to $15.6 billion right now.  

BNB Declines and Tether Gains

In another demonstration of the pyramid scheme that is crypto, the value of BNB, Binance’s native token, declined by 8%. As of this writing, BNB/BUSD trading pair accounts for almost 16% of the trading markets for BNB. But that decline turned to be momentary. The token, which has no verifiable use case beyond its immediate ecosystem and is almost certainly a security, is up by 1.5% from its price 24 hours ago to $296.82.

Meanwhile, traders are said to be shifting their dollars to Tether, the crypto world’s biggest stablecoin by market cap. But their actions can hardly be characterized as a flight to safety since Tether itself is unregulated and is no stranger to controversy.

It seems there is no place to hide in the current cryptocurrency ecosystem.    

BUSD Damage  

Considering that Paxos has stopped minting BUSD, the stablecoin’s supply will decline over time. A decline in supply should make an asset more valuable. If it has value, that is.

Even though it is the world’s third biggest stablecoin, BUSD functions in a limited ecosystem populated mostly by Binance and its affiliates. How much value will investors accord to a centralized exchange that is unregulated and awash with fraudulent volumes for worthless tokens remains to be seen.

The regulator’s chokehold on BUSD also affects its derivative cousin. Without a fresh flow in circulation, the death of Binance-Peg BUSD (PBUSD), which circulates on decentralized finance (DeFi) trading apps on the unregulated Binance Smart Chain, is almost certain. a derivative that is used on other unregulated networks, is almost certain.

Another collateral damage from BUSD’s problems is Binance’s much publicized Proof of Reserves (PoR) report. The report was an effort to bring transparency to crypto by assigning arbitrary values to worthless tokens. It becomes worthless. As do the constituents of an industry fund proposed by the exchange.

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