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The Binance USD (BUSD) stablecoin is a product of Binance, one of the world's leading crypto exchanges, and Paxos Trust Company, a regulated blockchain and tokenization infrastructure platform. It stands apart from other stablecoins as one of the few that complies with the regulations set by the New York State Department of Financial Services (NYDFS).
However, in February 2023, following notice from the Securities and Exchange Commission (SEC) to Paxos that BUSD is an unregistered security, NYDFS ordered Paxos to halt the minting of BUSD. Paxos duly complied with this directive and ceased the minting process soon after, ending its relationship with Binance. The Binance USD supply and market capitalization have plummeted since the announcement, though it retains its peg to the U.S. dollar.
For those wondering what is BUSD and what the fuss is about, we'll tell you all you need to know about this stablecoin, from its beginnings to what's next.
Key Takeaways:
Paxos has stopped minting BUSD under an order from the NYDFS and announced that its relationship with the crypto exchange Binance is terminated.
While Paxos offers a 1:1 redemption from BUSD to the U.S. dollar, and conversion from BUSD to Paxos’ own stablecoin, USDP, Binance is encouraging its users to switch from BUSD to FDUSD.
Other stablecoin alternatives for investors to consider include USDT and USDC, the two largest stablecoins in terms of market cap.
As a crypto stablecoin, Binance USD (BUSD) is tied to the value of a fiat currency. Specifically, it’s pegged to the U.S. dollar (USD), which allows it to maintain a stable price. The redemption rate is one BUSD for one USD. Based on market capitalization, Binance USD is ranked the third-largest stablecoin after Tether (USDT) and USD Coin (USDC).
Binance USD has been issued by Paxos on the Ethereum chain as an ERC-20 token. Binance’s crypto exchange also features wrapped BUSD, which NYDFS doesn’t directly regulate. Known as Binance-Peg BUSD, this wrapped token runs on other major blockchains such as Polygon, Avalanche and BNB Chain. Users can freely swap between ERC-20–based BUSD and Binance-Peg BUSD between supported blockchains.
The BUSD stablecoin supports a seamless user experience on the Binance exchange with a diverse variety of available BUSD products. It’s also traditionally been a desired option for users concerned about the crypto market's volatility. Since BUSD is one of the largest stablecoins, users can also trade BUSD on many platforms outside Binance, and even use it as a form of payment for various goods and services.
Under the regulatory oversight of NYDFS, Paxos has conducted monthly audits on the BUSD reserves, alongside with a third-party accounting firm, to ensure they’re 100% backed by cash or cash equivalents, with BUSD’s value supported by assets kept in reserve. Paxos also has the authority to mint and burn BUSD, as well as the ability to freeze or confiscate BUSD assets from malicious users.
The notable partnership between Paxos and Binance and the launch of the BUSD token was announced in September 2019. BUSD immediately became popular upon its launch, stemming partly from a thoughtful marketing strategy. In less than two years, BUSD’s market cap exceeded $1 billion, with its price as a stablecoin remaining relatively stable ever since.
As the entity responsible for minting BUSD tokens, Paxos is also the custodian that ensures enough USD is kept in reserve to back the BUSD tokens. Binance, on the other hand, is responsible for providing customer support and listing BUSD tokens on exchanges.
Ever since the series of crypto market meltdowns brought about by recent major incidents like the Terra/Luna collapse and the FTX insolvency, the regulatory crackdown on crypto has gained momentum. Now the third-largest stablecoin, BUSD has also come under scrutiny following the SEC's suing of Terra/Luna's founder for fraud.
On Feb 3, 2023, SEC issued a notice to Paxos alleging that BUSD isn’t a registered security, and outlining its intention to charge Paxos for violating federal security laws. Paxos released a statement objecting to SEC's claim, stressing that BUSD isn’t categorically considered a security. Just 10 days later, however, NYDFS ordered Paxos to halt its minting of BUSD tokens.
As of Feb 21, 2023, Paxos stopped minting Binance USD tokens to comply with the order. By Sep 11, 2023, BUSD’s market cap has declined to $2.58 billion, and will continue to decline as users continue to redeem BUSD. In contrast, its peak was over $23 billion in November 2022. Until February 2024, Binance USD tokens will continue to be backed by Paxos Trust Company, and holders can redeem them for U.S. dollars at a rate of 1:1 with Paxos. In addition, customers can choose to convert their tokens to USDP, another Paxos-issued stablecoin.
Notably, Binance has also stated that it will no longer support Binance USD tokens after this date. It has recommended that its users convert their BUSD to First Digital USD (FDUSD) instead, a stablecoin that launched in June 2023 and was listed on Binance in July. There’s no fee for this conversion.
As the market capitalization and circulation of BUSD has fallen dramatically due to the recent regulatory issues, Binance has taken steps to reassure its users that their assets are safe.
One of these steps has been to replace the Binance USD held in the Binance emergency insurance fund with TrueUSD (TUSD) and USDT. The purpose of the emergency insurance fund is to provide financial protection to Binance users in the event of security issues. The fund’s value was $1 billion in January 2022, comprising a combination of BTC, BUSD and BNB. Now, the fund holds BTC, BNB, USDT and TUSD.
In March, Binance also promoted fee-free trading of TUSD and added numerous TUSD trading pairs in a bid to get users to convert their BUSD holdings to TUSD, resulting in the rapid growth of TUSD's market cap to the fifth position among stablecoins. In late June 2023, however, TUSD depegged on Binance.US, trading as low as $0.80. This caused a switch in Binance's strategy to a relatively unknown stablecoin, FDUSD, which recently launched on BNB Chain and Ethereum on Jun 1, 2023. Binance users were encouraged to convert BUSD to FDUSD with offers such as fee-free 1:1 conversions and trades.
While FDUSD’s market cap has risen considerably following Binance's action, it’s still relatively small compared to the two largest stablecoins in the market, USDT and USDC. Additionally, FDUSD has yet to gain traction in the market, with Binance being the only exchange offering trading pairs for this stablecoin.
For now, USDT and USDC will remain the market go-tos for stablecoins due to their history of reliability and wide adoption across exchanges. USDT continues to take the lead with a market cap of over $82 billion, while USDC's market cap is over $26 billion (as of Sep 18, 2023).
Now that the Binance USD is no longer being minted, many investors are choosing to convert their BUSD holdings to other stablecoins, such as USDT and USDC. Both coins are available via Bybit’s One-Click Buy feature, which is compatible with numerous payment types and currencies. USDT can be traded on Bybit as a Spot pair (USDT/EUR). USDC can be traded as a Spot pair in USDT (USDC/USDT) or EUR (USDC/EUR), and is also available as a Perpetual contract (USDC/USDT).
The tumultuous nature of the cryptocurrency market extends to stablecoins, and has most recently resulted in the decline of the Binance USD token. Since BUSD tokens are no longer being minted and exchanges are already limiting trades, investors holding BUSD may consider alternative stablecoins for their holdings. While Binance is advocating for conversion to FDUSD, it remains to be seen if FDUSD will gain widespread adoption. Therefore, investors holding BUSD should also consider other stablecoins, particularly the two largest, USDT and USDC.
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