For the uninitiated, stablecoins are cryptocurrencies designed to mirror the price of a regular fiat currency, typically the US dollar. Stablecoins provide a practical solution for switching from fiat to a cryptocurrency and vice versa, for those who do not wish to exit the crypto markets when taking profits or stopping losses. Pre-stablecoins, switching from one to the other came with high fees, inconvenient delays, and unwanted downtime. Generally, there are three types of stablecoins, namely, fiat-backed, crypto-backed, and algorithmic. BUSD, in short for BinanceUSD, is issued by PAXOS and is the third-largest fiat-backed stablecoin with a market cap of approximately $18 billion. In this article, we shall be taking a closer look at this stablecoin.
Paxos is based in the US and prides itself on being a “top-funded blockchain company with more than $500 million in total funding from leading investors like OakHC/FT, Declaration Partners, Mithril Capital, and PayPal Ventures.” Paxos custodies the cryptocurrencies being bought and sold on Paypal. BUSD is the product of a partnership between PAXOS and Binance, with the latter being a leading international cryptocurrency exchange founded in 2017 in Hong Kong by a well-known founder and CEO, known as CZ, short for Changpeng Zhao. Paxos is also the USD custodian for BUSD.
BUSD was launched in September 2019 and is pegged at 1:1 to the US Dollar. Despite being pegged, stablecoins still grapple with price swings. Usually, when demand is high enough, it can push the price above a dollar, and the opposite happens when demand dwindles. We’ve seen BUSD hit an all-time high of $1.15 in March 2020 and an all-time low of $0.90 in May 2021. However, this $0.25 difference is relatively smaller than other swings experienced by other fiat-backed stablecoins.
Both Paxos and BUSD are approved and regulated by the New York State Department of Financial Services (NYDFS), notably one of the few stablecoins to have such approval. Therefore, by assumption, Paxos must from time to time be audited due to its status as a trusted company. In 2019, Paxos obtained a ‘no-action relief’ letter from the SEC to be able to settle equities securities on a private permission blockchain platform. Put very simply, this allows for the transfer of securities from the seller to the buyer. No-action letters are requested by applicants who are uncertain of whether a service, product or action from their end constitutes a violation of the federal securities law. When granted, the SEC accepts to not take any enforcement action given that certain conditions are met by the requesting company.
In another milestone for Paxos, conditional approval to become a fully-regulated crypto bank was granted in April 2021 by the Office of the Comptroller of the Currency (OCC), making the firm the third federally regulated crypto bank in the US, following Anchorage and Protego.
Paxos claims BUSD is 100% backed by cash reserves and US treasury bills, the latter considered to be one of the safest investments available, which is attested by an auditing firm called Withum. Just like most other stablecoins, BUSD was created for ease of use within the Defi ecosystem, and also serves as the native stablecoin of the Binance Exchange. The BUSD ecosystem has grown exponentially in 2021, largely due to increasing user adoption. Its market cap expanded by a whopping 14 billion dollars in one year and as can be seen below, there is a plethora of wallets, platforms/services, DEXs, and exchanges supporting BUSD, along with yield farming and lending options available too.
BUSD was issued as an ERC-20 token and also supports BEP-2, which is a technical standard for the issuance and implementation of tokens on the BNB Chain. What is known as the standard is basically, a set of rules that tokens need to follow to be functional in the BNB Chain Ecosystem.
Following in the footsteps of Tether and Circle, Paxos released its first breakdown of reserves in July 2021 backing BUSD and PAX, another stablecoin issued by Paxos. The company boasts of having 96% in cash and cash equivalents, and 4% in US treasury bills.
Burstein who is Paxos’s general counsel and CCO compares BUSD to Tether and USDC in a blog post and makes a very strong case for the use of BUSD based on it being regulated, audited, liquidity and trustworthiness. However, it’s worth noting that since the blog post Tether has been steadily reducing its commercial paper reserves and so has Circle, as per this report published in October 2021. The major difference between the three is that we must trust what Tether says for its reserves breakdown, whilst on the other hand, relying on published attestations (not audits) to confirm Circle’s reserves. Attestations are different from audits, in that they are merely verifications of the information provided by an auditing firm.
These distinctions are becoming highly important in light of the recent TerraUSD meltdown, which saw many investors suffer tremendous losses, and also the highly bearish sentiment the markets currently find themselves in. Without a doubt, credibility and trustworthiness will become ever more important for the stablecoin and crypto industry. Regulatory oversight, regular attestations, and robust reserves should hopefully all work together to prevent future de-pegging events, to safeguard investor interests.
In a recent blog dated March 10th, 2022 Paxos announced it has received further in-principal regulatory approval from the monetary authority of Singapore, making it a first for a crypto firm to obtain approval in both New York and Singapore. Amongst the top three fiat-backed stablecoins, it seems as though BUSD enjoys the highest degree of regulator support. Will this influence where investor confidence shifts in the future?
Circulating supply for BUSD and USDC increased following the terraUSD de-pegging, a rather unexpected black swan event that has not escaped regulator notice. Is BUSD better poised to make the cut with increasing regulation? Time will tell, and in the meantime stay tuned for more in this series “All eyes on stablecoins: 10/10 stablecoin series”.