- Binance has temporarily stopped the issuance of its BUSD stablecoin due to a system upgrade.
- BUSD redemptions are still available, but new issuances are expected to resume by February 17th.
- BUSD is a USD-backed stablecoin that is issued by Binance in partnership with Paxos.
- Stablecoins like BUSD are gaining popularity as a way to store value and make transactions on cryptocurrency exchanges without being exposed to the price volatility of cryptocurrencies
Recent actions cause turmoil at Binance
Binance is a cryptocurrency exchange founded in 2017 by Changpeng Zhao, a well-known figure in the crypto community. The exchange quickly gained popularity among traders and investors due to its broad selection of cryptocurrencies, competitive fees, and user-friendly interface. One of the unique features of Binance is its native exchange token, Binance Coin (BNB), which can be used to pay trading fees on the platform and grants holders various benefits, such as discounts and access to exclusive services.
However, the recent regulatory action against Binance and its partner Paxos over their dollar-pegged stablecoin, Binance USD (BUSD), has caused significant market turmoil and raised concerns about the future of the exchange and the BNB token.
The regulatory crackdown started on February 13, 2023, when the US Securities and Exchange Commission (SEC) announced that it plans to sue Paxos for violating investor protection laws. The SEC alleges that Paxos violated the securities laws by offering and selling BUSD without registering it as a security, which is required under federal securities laws.
The news of the SEC’s action caused a sharp drop in the price of BNB, which fell more than 5% in a few hours. Traders also started to withdraw their funds from the exchange, with a net outflow of $356 million in the last 24 hours, according to data from Nansen. The panic selling continued the following day, and the price of BNB dropped another 5%, reaching a low of $285.
Just Kept getting worse
The situation got worse when the New York Department of Financial Services (NYDFS) directed Paxos to halt the issuance of additional BUSD. In a statement, Paxos said that it “categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws.” The halt comes into effect on February 21, but the firm said that “BUSD will remain fully supported by Paxos and redeemable to onboarded customers through at least February 2024.”
The news of the NYDFS action added to the uncertainty and market volatility, with many traders and investors fearing that the regulatory scrutiny could spread to other cryptocurrencies and exchanges.
Zhao Takes to Twitter but that does little help
Binance CEO Changpeng Zhao took to Twitter to express his concerns about the impact of the regulatory action on the crypto industry. He said that if the stablecoin is deemed a security, “it will have profound impacts on how the crypto industry will develop.”
6/ "IF" BUSD is ruled as a security by the courts, it will have profound impacts on how the crypto industry will develop (or not develop) in the jurisdictions where it is ruled as such.— CZ 🔶 Binance (@cz_binance) February 13, 2023
Zhao also assured the Binance community that the exchange is taking all necessary measures to comply with the regulations and maintain the safety of users’ funds. He said that “Binance has always operated with the highest standards of compliance and security, and we will continue to do so.”
Despite the reassurances from the Binance CEO, the market remained volatile, and the price of BNB continued to drop, reaching a low of $280 on February 15, the lowest level since October 2022.
The Binance Coin is one of the top-five largest cryptocurrencies by market capitalization, with a total value of over $45 billion. However, the recent market turmoil and regulatory scrutiny have highlighted the risks and challenges of investing in cryptocurrencies, even for established players like Binance.
Understanding the decision to halt
To understand the rationale behind this decision, it’s important to note that BUSD is a stablecoin that is pegged to the value of the US dollar, with each BUSD token representing one US dollar. As such, the supply of BUSD in circulation needs to be carefully managed to ensure that its value remains stable.
Binance’s decision to halt BUSD issuance was likely driven by concerns around inflation and the potential impact on the value of BUSD. As more BUSD tokens are minted and put into circulation, there is a risk that the increased supply could lead to a devaluation of the stablecoin. This, in turn, could lead to increased volatility and reduced confidence in the BUSD ecosystem.
In addition, Binance may have wanted to limit the overall supply of BUSD in circulation to ensure that it remains in line with market demand. By halting issuance, Binance can prevent an oversupply of BUSD and maintain the balance between supply and demand, which is critical for the stability of the stablecoin.
It’s worth noting that Binance has not provided specific details about the reasons behind the decision to halt BUSD issuance. However, it’s likely that a combination of factors, including concerns around inflation and supply and demand dynamics, played a role in the decision-making process.
It’s also important to note that while the decision to halt BUSD issuance may have short-term impacts on the availability of BUSD in circulation, it’s unlikely to have a significant impact on the long-term stability and growth of the stablecoin ecosystem. BUSD remains an important asset for traders and investors, and there is a strong demand for stablecoins that can provide a hedge against the volatility of other cryptocurrencies.
Moreover, BUSD has already gained significant traction in the market, with over $12 billion in market capitalization as of February 2023. This suggests that the stablecoin has already established a strong foothold in the cryptocurrency space, and its growth is likely to continue as more traders and investors seek out stablecoins as a safe haven in times of market volatility.
Binance’s decision to halt BUSD issuance is likely driven by a combination of concerns around inflation and supply and demand dynamics. While the decision may have short-term impacts on the availability of BUSD in circulation, it’s unlikely to have a significant impact on the long-term stability and growth of the stablecoin ecosystem. As the cryptocurrency market continues to evolve, stablecoins like BUSD are likely to play an increasingly important role in providing a hedge against market volatility and providing investors with a safe and stable store of value.