Opinion: Pressure on BUSD does not pose risks to other stablecoins

Regulators are not targeting all “stablecoins”, applying harsh measures against Paxos, the issuer of Binance USD (BUSD). This was stated by Marcus Tillen, head of research at Matrixport’s crypto-financial services division.

2/ 📉 In the past 24 hours, #BNB has dropped -6%, and around $2.4bn of shorts have been put on. But the issue does not appear to be around #stablecoins per se, what the market initially feared, but rather that #Paxos was not stringent enough with its oversight of the #BUSD.

— Matrixport (@realMatrixport) February 14, 2023

The specialist noted that the asset [BUSD] may have been monitored insufficiently, and that the problem itself, “apparently, is not related to stablecoins in general,” he added.

“Paxos violated its obligation to conduct an individual periodic risk assessment and due diligence of Binance and BUSD customers issued by the company,” — Marcus Tillen explained.

On February 10, the NYDFS initiated an investigation into Paxos. The regulator later ordered the firm to halt issuing the exchange-linked stablecoin.

The company said it would halt the asset’s issuance but would continue to support buyback and conversion operations at least until February 2024. The NYDFS explained its actions as due to insufficient collateral backing Binance USD.

It also emerged of threats SEC to sue Paxos over securities-law violations in issuing BUSD.

Tillen explained that 11 billion Binance USD have been issued on the Ethereum network. In the blockchains BNB Smart Chain there is also BUSD with a total market value of $4.8 billion pegged to its copy on the network of the second-largest cryptocurrency by market capitalization. Similar analogues also exist on the Avalanche and Polygon blockchains.

“It appears that the NYDFS is concerned that these assets, worth $4.8 billion, may not have been properly collateralised or there were issues maintaining the peg,” — he suggested.

The expert reminded that on February 13 Paxos said that “the BUSD issued by it was and always will be backed by reserves denominated in US dollars, on a 1:1 basis, fully segregated and held in separate accounts.” The company stressed that, besides issues regarding Binance USD, there are “no charges” against Paxos.

The expert did not rule out that regulators may have also reacted to the January 24 incident when it became known that the exchange mixed customer funds with collateral.

Tillen expressed optimism about the exchange-linked stablecoin.

“Binance shot itself in the foot a little here, but they are working on it and they should be able to resolve this issue. So should we really worry? I don’t think so. Is there a decoupling of BUSD from USD? No. We are no longer in a bear market where you worry about downside; in a bull market you focus on the upside,” — he concluded.

10/ 🚨 #Binance has shot itself a little bit in the foot here but they are working on it and it should be resolved. So should we be really worried? I don’t think so. We are no longer in a #bearmarket where you worry about downside, in #bullmarkets, you focus on the upside.

— Matrixport (@realMatrixport) February 14, 2023

Earlier, Bloomberg wrote about Circle complaint to the NYDFS regarding the quality of BUSD reserve management. The co-issuer of the competing asset USDC pointed to the alleged insufficient backing of BUSD.