The saga of Binance and its stablecoin BUSD has taken a dramatic turn. The leading cryptocurrency exchange’s ambitious vision of offering a stable digital asset pegged to the US dollar is coming to an end after years of regulatory scrutiny.
The tragedy is that BUSD will exit stage left just as the stablecoin market ticks upward after a prolonged period of decline.
It all began in 2019, when Binance partnered with New York-based Paxos to launch BUSD. The timing seemed perfect – stablecoins like Tether’s USDT were gaining popularity among crypto traders who wanted to park funds without worrying about volatility. BUSD was marketed as a transparent and regulated alternative, with Paxos handling issuances and redemptions.
“We believe that powering the future of finance requires transparency and trust,” said Binance co-founder He Yi at the launch. The exchange pledged that every BUSD token would be fully backed by US dollar reserves held at Paxos-managed bank accounts.
Over the next three years, BUSD slowly gained traction and by early 2023 had over $16 billion in circulation, making it the third largest stablecoin. But the party didn’t last long.
In February, New York’s Department of Financial Services ordered Paxos to stop issuing new BUSD tokens . The regulator cited “unresolved issues” related to oversight of Binance’s relationship with Paxos, and concerns over its reserves. While existing tokens could still be redeemed, the move essentially prevented any new BUSD from entering circulation.
“Paxos is now required to cease facilitating these unregistered offers and sales of BUSD,” said Adrienne Harris, NYDFS Superintendent.
Then, in August, Binance agreed to phase out support for BUSD. Caught in the crosshairs of global regulatory pressure, the world’s largest crypto exchange decided that it would throw in the towel. Binance will cease support for its BUSD stablecoin on December 15, although users can redeem BUSD until February 2024, but withdrawals will halt on December 31, with remaining balances automatically converted to FDUSD.
However, BUSD was on the slide before its end occurred. It hit its peak market cap ($23.36bn) on November 12, 2022, one day after FTX declared bankruptcy. Two months later, its market cap was down to $16.23bn, a fall of 31%. Two months after that, it was at $8.41bn, and falling fast.
At the time of writing, its market capitalization/circulating supply sits at only $1.7bn as its demise looms ever closer.
Much of the decline can be attributed to the collapse of FTX and the ongoing effects of the bear market. But its departure comes at a time when stablecoins look to be having a very minor resurgence.
Stablecoin supply began this year at $138bn, according to data from The Block, but dropped to as low as £121bn by early October. But a broader market resurgence that month helped pause the decline. And, by the end of November, total supply was back up to $126bn. Not exactly a head-turning comeback, but certainly a sign of a potential turnaround in the market.
DeFi, an integral use case for stablecoins like BUSD, also saw a concurrent resurgence from October 19, with total value locked (TVL) in DeFi protocols up 28% in just over a month.
BUSD was already due to be wound down when Binance and its former CEO Changpeng Zhao admitted serious criminal wrongdoing and struck a deal with the U.S. Department of Justice. One may wonder: if you could take the criminality, non-compliance, and general legal trouble out of Binance from the start, would BUSD have thrived?
Thanks to the sheer scale of the legal quagmire, perhaps it is an impossible question to answer
For years, Binance walked a tightrope between offering innovative crypto products while trying not to upset watchdogs. It succeeded in building the world’s largest exchange despite lacking a central headquarters or incorporation in any country. But questions around compliance and commitment to regulation kept mounting until its CEO, Changpeng Zhao, had to resign.
The winding down of BUSD marks the end of an era for Binance. Unfortunately, its legacy may be remembered more for run-ins with the law rather than for providing traders with the coveted stablecoin they initially hoped for.