While the cryptocurrency industry has been on regulators’ radar for the past few years, including major exchanges like Binance, the most targeted aspect is stablecoins. Following the recent saga between Paxos, the issuer of the Binance brand stablecoin BUSD, and the Security Exchange Commission (SEC), the stablecoin market has been confused. Investors searched for the safest stablecoin to save their funds.
According Binance Chairman and Chief Executive Officer (CEO) Changpeng Zhao, popularly known as “CZ”, the cryptocurrency industry may soon evolve away from the ubiquitous the era of dollar-backed stablecoins to stablecoins that are algorithmically backed by other assets.
Will the Crypto Industry Switch to Another Real Word-Backed Currency?
Following the tightening of regulations regarding USD-backed stablecoins, the crypto industry is now looking for other alternatives. As reported by Bitcoinist, the United States Securities and Exchange Commission (SEC) has stepped up its actions against crypto companies, such as Paxos and crypto exchange Kraken.
CZ said in a Twitter Q&A on Tuesday:
The pressure on stablecoins is quite significant. Several agencies are putting pressure on it. This will reduce the USD stablecoin market, so the industry is exploring its options.
Stablecoins are less volatile digital assets backed by fiat currency. Investors use it to reduce their exposure to volatility. Over the past few years, stablecoins backed by the US dollar have been the most popular. The dollar-backed stablecoin accounts for almost the entire stablecoin market.
Although stablecoins backed by fiat currencies, such as the euro, exist, the dollar-backed market remains the most dominant. Tether USDT, USD Coin, BUSD and DAI account for more than 10% of the global cryptocurrency market capitalization.
However, as regulators begin to focus on regulating dollar-backed stablecoins, CZ believes the industry could see the emergence of other assets and even algorithm-backed stablecoins. CZ noted“I think we will see more stablecoins based on the euro or whatever, the Japanese yen, the Singapore dollar.”
Algorithmic stablecoins are assets that take advantage of complex computational combinations and traders’ incentives to maintain their individual peg to assets such as the dollar. An example of this type of stablecoins was the UST of Terra, the digital assets that crashed in 2022, leading to an acceleration in the crypto bear market.
Terra’s UST crash was triggered by a cascade of redemptions that led to a massive bank run on the asset. This aggressive takeover process ultimately led to the collapse of UST. The stablecoin algorithm failed to maintain the one-to-one balance on the asset. According to CZ:
The regulatory crackdown around stablecoins was likely triggered in part by the collapse of algorithmic stablecoin Terra Luna in May.
SEC orders Paxos to halt BUSD issuance
At the start of the week, the The New York State Department of Financial Services ordered Paxos Trust Co. to stop issuing BUSD, the third largest stablecoin in the cryptocurrency market. According to recent reports, Paxos will terminate its relationship with Binance and cease distributing BUSD by February 21.
Paxos will still support BUSD for the next 12 months despite the breakout. According to CZ, Paxos only halted the issuance of new tokens. “The fact that this is an orderly liquidation is a good thing. People holding stablecoins should not lose any value,” CZ noted.
Notably, CZ has always clarified Binance’s unique connection to the BUSD stablecoin. The CEO said that BUSD was not his or his team’s idea, but something created by Paxos. Speaking of Binance, the exchange’s native token, Binance Coin (BNB), is struggling to hold its own amid these events.
As of this writing, BNB is up 3.6% in the past 24 hours after falling 9% in the past seven days. Its current market price is still well above $250, and it is again looking to break through the $300 mark.
Featured image from Bloomberg, chart from TradingView.