- Analysts have revealed that Binance undercollateralized its holdings by at least $1 billion.
- Binance has explained after the release of a Bloomberg article that ‘’there was a timing mismatch in backing Binance-Peg BUSD with USD.’’
- Last year, Terra’s UST stablecoin lost its peg, leading to a massive sell-off In the crypto market.
Binance admitted that it has yet to consistently maintain its system, which caused its offering to Binance Smart Chain BUSD-one of the platform’s stablecoins that are said to be backed 1:1 to the US dollar, were undercollateralized by at least $1 billion.
Stablecoins are cryptocurrencies that derive value from an asset, such as US Dollar, which is less volatile than other crypto assets. However, analysts say the issue has caused BUSD to slide down by a large margin at least three times.
A Binance spokesperson who spoke to Bloomberg noted that “the retention process involves several teams and has not always been perfect, which may have caused operational delays in the past.”
The US dollar fully collateralizes BUSD on the Ethereum blockchain in a process overseen by New York financial technology firm Paxos. Notably, BUSD on Binance’s blockchain, Binance Smart Chain, is not similarly regulated by an externally vetted company. To enable the legitimacy of its BUSD, Binance alleges that it keeps fully collateralized with Paxos-regulated BUSD. Thus, the BUSD kept on Binance’s blockchain is known as Binance-Peg BUSD. However, it turned out that Binance -Peg BUSD needed to be pegged.
The data collected and analyzed by Jonathan Reiter and Patrick Tan of the blockchain analytics company- indicated that the Binance-Peg BUSD wallet on the Ethereum blockchain meant to contain the BUSD to back all Binance-Peg BUSD- had a smaller balance than the amount of Binance-Peg BUSD circulating on the Binance Smart Chain.
Three times between 2020 and 2021, the amount of Binance-Peg BUSD circulating on the Binance Smart Chain and the amount of real BUSD supposedly backing it eclipsed $1 billion.
“There was a timing mismatch,” Binance
However, the exchange platform explained through a blog post after Bloomberg’s article stating that “there was a timing mismatch in backing the Binance-Peg BUSD with BUSD. The data shows that the rebalancing only sometimes kept pace with the demand for Binance-Peg BUSD. Having identified this ourselves last year, we now rebalance more frequently to ensure that Binance-Peg BUSD is fully backed.”
The largest crypto exchange in the world also noted:
“Binance has periodically rebalanced or updated the assets in the pegged addresses, not in real-time. We now rebalance more frequently to ensure it’s always 1:1 backed.”
However, various companies failing to collateralize stablecoins fully have crashed in the crypto space in the past year. Terra’s stablecoin UST in May, whose value was said to be based on an auto-pegging algorithm rather than actual cash reserves, collapsed, wiping out $40 billion in value and sparking the ongoing market turmoil.
However, Binance has alleged that BUSD is locked in an Ethereum wallet before the equivalent amount is circulated as Binance-Peg BUSD on other blockchains. The process could’ve worked the other way for such a massive amount of Binance-Peg BUSD to have aired on other chains without the corresponding amount of BUSD having locked up on Ethereum.
Stablecoins such as BUSD and Binance-Peg BUSD are designed to bring confidence and trust to the often volatile and insecure crypto market. By tying their value to assets like the US dollar, firms such as Binance are trying to reassure their users that stablecoins will remain. At the same time, other digital currencies may be vulnerable to huge swings in the ecosystem.
