Binance’s native stablecoin, Binance USD (BUSD), was the third largest US dollar-pegged stablecoin, minted by blockchain infrastructure platform Paxos Trust Company through a technology transfer agreement between the two companies.
However, on February 13, the New York Department of Financial Services ordered Paxos to stop minting new BUSD tokens.
The move came just days after the US Securities and Exchange Commission (SEC) issued a notice from Wells alleging that BUSD violates securities laws.
Binance CEO Changpeng Zhao even predicted that regulatory restrictions would force other cryptocurrency firms to move away from dollar-pegged stablecoins in the near future and seek alternative tokens pegged to the euro or Japanese yen.
Zhao’s comments came during an AMA (ask me anything) session on Twitter, in which he stated that while gold is a good backup option, most people’s assets are in fiat currencies. He admitted that the dominance of the US dollar in international markets makes it the fiat currency of choice, which is one of the main reasons for the popularity of dollar-pegged stablecoins. However, regulatory measures against this type of asset could give way to other stablecoins.
Zhao also touched on the role of algorithmic stablecoins, many of which are largely decentralized, stating that algorithmic stablecoins could play a more prominent role in the cryptocurrency ecosystem in the future, but are inherently riskier than algorithmic stablecoins. fiat-backed tokens.
Algorithmic stablecoins are traditionally not guaranteed, but use mathematical algorithms often tied to a tokenomic model rather than being backed by a real-world asset like the US dollar.
Most algorithmic stablecoin projects use a dual system of tokens: a stablecoin and a volatile asset that maintains the stablecoin’s parity by maintaining the supply and demand system that keeps the value of the stablecoin unchanged. To mint a specific value of the stablecoin, an equal amount of either the native token or the volatile token is burned.
Following the regulatory action against BUSD, Binance turned to several alternative stablecoins, including some decentralized ones, to meet its stablecoin-focused liquidity needs. From February 16 to 24, Binance minted 180 million TrueUSD (TUSD) stablecoins.
Decentralized Stablecoins Have a Troubled Past
Decentralized stablecoins first became popular in the decentralized finance (DeFi) ecosystem with the creation of Dai (DAI) by MakerDAO. DAI maintains its parity through a smart contract system governed by a decentralized autonomous organization (DAO). Although DAI has remained true to its decentralized securities, it got caught up in the recent banking contagion that caused it to lose its peg along with Circle-issued USD Coin (USDC).
Although algorithmic stablecoins hold true to the decentralized values of the crypto ecosystem, their implementation in real life has had a troubled history, especially with the collapse of the Terra ecosystem and its algorithmic stablecoin TerraUSD (UST), now called TerraClassicUSD (USTC).
The Terra algorithmic stablecoin was considered in its day as the best example of how a decentralized stablecoin could make it to the mainstream. However, after its divestment and subsequent collapse of the ecosystem, the future of this type of stablecoin has been called into question.
Decentralized stablecoins suffered a severe blow with the Terra saga, and their reputation was further tarnished by the actions of Terraform Labs co-founder Do Kwon. Kwon eluded law enforcement while maintaining the debacle was not his fault, despite on-chain evidence suggested that the depreciation was caused by an entity that sold more than $450 million worth of UST on the open market. Kwon himself supposedly controlled that entity. Kwon was recently detained by the Montenegrin authorities.
With centralized stablecoins under regulatory scrutiny and trust in algorithmic stablecoins demolished, what does the future of a decentralized stablecoin look like? Does it have any future?
Hassan Sheikh, co-founder of decentralized incubator platform Maker DAO, told Cointelegraph that the move to decentralized stablecoins would not happen the way people expect. Centralized exchanges are highly vertically integrated, creating networks, wallets, staking solutions, mining operations, and more.
“There is no decentralized stablecoin on the market yet that is going to be adopted by exchanges. It will not be DAI or the like. The market capitalization is not significant enough to have the necessary network effect,” Sheikh says, adding: “Exchanges are likely to fork protocols like Maker and boost traction for their controlled ‘decentralized’ stablecoin to capture that value.” An exchange’s decentralized stablecoin wouldn’t really be decentralized, and most likely wouldn’t exist yet, as majors would likely go after their own.”
As for BUSD’s regulatory issues, Sheikh said it was just the first test of people’s willingness to switch to a new publicly-issued stablecoin. If proven, the market will change. Expecting a Binance version of DAI is reasonable, he added.
Sheikh also shed light on the main issues with decentralized stablecoins currently on the market. He said that most of these stablecoins are so entrenched in USDC that they are barely decentralized.
Many decentralized exchange and decentralized stablecoin pools, such as DAI and Frax (FRAX), have significant collateral exposure to USDC. This is why DAI issuer MakerDAO submitted an emergency proposal to address the risks of its collateral exposure of $3.1 billion in USDC when the stablecoin’s price crashed.
If anything, “the aura of its marketing as decentralized has now been erased with the recent difficulties of USDC, which quickly eroded the DAI peg. The move to a decentralized stablecoin is too far away, as what will be the dominant stablecoin has not yet it exists. Exchanges support them solely for volume profits. The few BTC/DAI pairs and the like that exist are so weak in activity that the foreseeable future shows no sign of a shift to decentralized stablecoins in major liquidity partners.” Sheikh stated.
Exchanges integrate with fiat-backed stablecoins
Fiat-backed stablecoins have become a lifeline in today’s cryptocurrency world. In the early days of cryptocurrency exchanges, these stablecoins acted as an onboarding tool for many traders, and over the past decade, they have also become a key liquidity provider.
“Fiat-backed stablecoins are so entrenched on exchanges that it is highly unlikely to expect a massive turnaround despite regulatory scrutiny.” Shiekh told Cointelgraph.
Abdul Rafay Gadit, co-founder of cryptocurrency trading platform Zignaly, told Cointelegraph that despite the recent decoupling of USDC, cryptocurrency trading platforms still prefer US dollar-pegged stablecoins.
“I personally believe that [Tether] USDT is the best stablecoin today, with a 1 to 1 ratio and far from unfair regulations. USDC was unlucky due to its ties to SVB [Silicon Valley Bank]; otherwise they run a great business,” he said.
He told Cointelegraph that centralized stablecoins are a lifeline for the crypto ecosystem, and despite regulatory pressure, they will remain a dominant force.
Gadit said equities may move away from the US, but fiat-backed stablecoins will still reign:
“BUSD’s action strikes me as victimhood; I think it’s unfair and totally unfair. In the future, stablecoin issuers will try to stay away from the US, just as USDT issuer Tether operates out of Hong Kong.”
Tether (USDT) continues to dominate the stablecoin market despite ongoing regulatory scrutiny against many other US dollar-pegged stablecoins. Industry insiders believe that while decentralized stablecoins look promising, their real-world application has been questionable. Therefore, centralized stablecoins are likely to continue to dominate the cryptocurrency market.
Clarification: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.