New regulations eliminate Paxos’s BUSD amid fears of a broader crackdown on stablecoins

The cryptocurrency industry faces a new wave of regulatory uncertainty around one of its most successful and widely proliferated products — stablecoins. Earlier this week, U.S. regulators barred payment company Paxos from issuing Binance USD (BUSD) tokens, the Binance-branded stablecoin, which has thrived since 2019.

That regulatory action effectively drew the curtain on the industry’s third-largest stablecoin whose market cap has since declined to roughly $14 billion as it effectively winds down. Unsurprisingly, the new development has also raised concern about a possible all-out attack on a fundamental building block for the $1 trillion cryptocurrency space.

In light of the recent events around BUSD, this release of the Adaptive Analysis Newsletter dives deeper into the critical role stablecoins play within the crypto market infrastructure. We review the immediate impact of BUSD’s demise on significant competitors and the potential knock-on effects that a crackdown on some stablecoins could have on the cryptocurrency market.

Stablecoins — Key to a stable crypto market?

Since the release of Tether (USDT) in 2014, stablecoins have emerged as a killer use case for blockchain technology. These fiat-backed assets provide a safeguard against the inherent volatility associated with cryptocurrencies while also having the permissionless and borderless features of cryptocurrency technology. They also serve as a rail for investors to move US dollars in and out of the cryptocurrency ecosystem. They play an even more significant role in critical markets like Nigeria, where users have limited access to USD via the traditional banking system.

The role of stablecoins within the crypto ecosystem is further highlighted by their growing share in the broader industry. The top three stablecoins rank in the top ten cryptocurrencies and account for over 10% of the total market capitalization.

Additionally, stablecoin settlements topped $7.4 trillion in 2022 despite the crypto market turmoil. The record surpassed settlements by payment giants Mastercard and AmericanExpress and came from increased stablecoin adoption within the decentralized finance ecosystem.

Still, on adoption, Stablecoins have replaced BTC, ETH, and fiat as top quote currency in various spot cryptocurrency trading pairs. Most crypto exchanges prioritize listing cryptocurrencies alongside USD stablecoin pairs.

(Source: Kaiko Research)

Stablecoins being deeply embedded within the industry makes it unsurprising that an attack against their issuers would have far-reaching effects on the crypto markets. However, the early signs show that the market has absorbed the BUSD death sentence, albeit with tremendous caution, as the regulatory concerns remain.

The stablecoin market consolidates following BUSD’s shock exit

The consolidation in the market share of other leading stablecoins further underlines their importance to the crypto ecosystem. Following the regulatory action against Paxos over its BUSD business, investors have simply rationed their exposure by switching to Tether (USDT).

BUSD redemptions increased at Paxos following the news, while Tether's market capitalization has gained over $1.4 billion within the same period. Tether's stablecoin has been the biggest beneficiary from the BUSD collapse, rising to nearly $70 billion in market cap and over 50% of the total stablecoin market.

(Source: DanniiAshmore)

Meanwhile, Circle-issued USDC stablecoin saw outflows totaling over $1.45 billion following rumors the U.S-based entity may be the next to face the regulatory crosshairs. However, the fears have been allayed by a confirmation that Circle had not received any notice of regulatory action. USDC's market cap has recovered from the recent drawdown, contributing to the current crypto market rally.

Is the worst now over for stablecoins?

Although the market has shrugged off news of the BUSD demise, industry observers note that stablecoin issuers are not out of the woods yet. Paxos ceased issuing BUSD following a regulatory warning that doing so violated investor protection laws and that the stablecoin is allegedly traded as an unregistered security.

A similar verdict on Circle's USDC stablecoin could have a chilling effect on the U.S. crypto market, where the stablecoin is a major force. Aside from being the primary stablecoin for Coinbase's over 100 million users, the USDC token is a popular option within Ethereum's $30 billion DeFi ecosystem.

Over 1.6 million USDC holders may be affected by a U.S. regulatory action against Circle. Such an outcome could drain significant liquidity from the DeFi space and the broader crypto markets as holders seek redemption on their stablecoin holdings.

Offshore-based Tether (USDT) and DeFi-native stablecoin Dai (DAI) may once again benefit immensely from such an outcome. At the same time, a demise of more USD-based stablecoins could have a severe knock-on effect in the market despite the more bullish conditions as of late.

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