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Binance’s CZ Wary of Tether’s USDT — Calls it a “Black Box” of Stablecoins

Published August 1, 2023 10:50 AM
Teuta Franjkovic
Published August 1, 2023 10:50 AM
Key Takeaways
  • The CEO of Binance, Changpeng Zhao (CZ), spent an hour on Twitter Spaces, here is a rundown of his replies
  • CZ said he had not seen any audit reports of USDT and that it worries him
  • The CEO revealed the company’s intentions to introduce the First Digital USD in Hong Kong

In an effort to give investors alternatives to the current global stablecoin goliaths, Binance CEO Changpeng “CZ” Zhao is trying to introduce smaller algorithmic stablecoins to the market.

‘Let’s Just Diversify and See’

CZ mentioned the hazards connected with huge stablecoins like Tether and Binance USD during an ask me anything (AMA) session  on Twitter on July 31. Even though Tether is by far the largest stablecoin by market cap, he is still wary of the asset owing to its lack of transparency:

“I personally have not seen any audit reports of USDT. I don’t think most people I spoke to have not seen that either. So it’s kind of a black box because we just don’t know,” he said.

He continued that even apparently well-governed and well-examined stablecoins like Binance USD have their own unique set of unanticipated hazards.

Following the New York Department of Financial Services directive, blockchain infrastructure platform Paxos Trust Company dissolved its collaboration with Binance on February 13 and stopped producing new BUSD stablecoins.

“We actually have a small team working on algo stablecoins in different places that are not high scale, but they are very relevant locally in those places,” he said and added that, given that everything has some risk, the company’s strategy is to diversify and see which one gets bigger.

The CEO of Binance also revealed the company’s intentions to introduce the First Digital USD in Hong Kong and to focus on new stablecoin possibilities in Europe.

First Digital USD is a programmable stablecoin tied to the US dollar and run by First Digital Group under a Hong Kong license. On July 26, the business listed the FDUSD stablecoin on Binance.

Regulations continue to remain unclear regarding Binance. Last month, CZ requested the dismissal of a $1 billion lawsuit that the Commodities Futures Trading Commission had filed against him and Binance, claiming that the regulator had “overreached” its authority.

In a lawsuit filed on June 5 against Binance, CZ, and other connected companies, the U.S. Securities and Exchange Commission asserted claims of fraud, the sale of unregistered securities, and conflicts of interest.

What Are Main Stablecoins Concerns That Regulators Have?

There are several monetary policy implications of stablecoins. Stablecoins may make it more difficult for central banks to regulate the money supply, which is one of their biggest problems.

Central banks utilize monetary policy to manage the money supply and affect inflation and economic growth. Central banks can change interest rates and other monetary policy instruments to affect the amount of borrowing and spending in the economy.

By establishing a second monetary system independent of central banks, stablecoins have the potential to undermine the effectiveness of monetary policy. Stablecoin adoption could make it more challenging for central banks to manage the money supply and impact economic outcomes.

Stablecoins may also influence the demand for conventional currencies. Demand for conventional currencies could decrease if stablecoins gain acceptance as a medium of trade.

This could make it harder for central banks to control exchange rates by lowering the value of conventional currencies relative to stablecoins.

Central Banks Challenges

Central banks and regulators face a variety of challenges as a result of stablecoins. Stablecoins’ potential application in criminal activities like money laundering and terrorism financing is one of the biggest obstacles.

Because they are made to offer a more reliable form of trade, stablecoins may be used to facilitate unlawful transactions. Regulators must ensure stablecoin issuers have the proper anti-money laundering and know-your-customer policies to stop these kinds of crimes.

Stablecoins may also pose risks to the stability of the financial system. Stablecoins may present systemic threats to the entire financial system if adopted widely.

Regulators will need to keep a careful eye on stablecoin adoption to ensure it doesn’t endanger the financial system’s stability.

Concerns have also been raised concerning the potential for market manipulation by stablecoin issuers. Because stablecoins are intended to have a stable value, stablecoin producers could possibly manipulate the market by purchasing or selling huge quantities of stablecoins. Regulators must make sure stablecoin issuers refrain from such actions.

From Terra Crash to FED’s Warning

Cryptocurrency dubbed terraUSD crashed last year. It was given the name algorithmic stablecoin because an algorithm was used to maintain its one-to-one peg with the US dollar. Similar to how USDC, BUSD, and USDT are backed in full by actual assets like bonds, it was not. The algorithm failed, causing terraUSD to crash and startle the cryptocurrency market.

The U.S. Federal Reserve also cautioned  that “many bond and bank loan mutual funds continue to be vulnerable to redemption risks” in a report published in May 2022.

“We should simply utilize as many stablecoins as we can. We shouldn’t place a single wager,” he remarked, pointing out that the regulator shut down BUSD even though the company had undergone a thorough audit.

Due to the dangers associated with regulation and transparency, CZ disclosed that Binance is developing algorithmic stablecoins and diversifying its stablecoin partnerships to spread out any potential risk.

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