The crypto world was hit with a bombshell yesterday as financial institution Paxos was told it must stop issuing Binance USD (BUSD). BUSD is a Binance-branded stablecoin pegged to the US dollar. With the third largest stablecoin, second only to Tether and USDC, coming under the scrutiny of regulators, the question emerges whether another potential shock to the market is incoming.
The cessation of BUSD minting follows the SEC’s $30 million settlement with crypto exchange Kraken for an alleged unregistered offer and sale of securities through their staking as a service feature. Similarly, Paxos confirmed through Decrypt that the BUSD restrictions are due to a violation of investor protection legislation and claims that BUSD is allegedly being traded as an unregistered security.
The market capitalization of BUSD has been declining in recent months, falling from almost $23.5 billion in November to $16 billion at the time of writing. The regulatory action against BUSD is likely to spur a further drop as enterprises and individuals with heavy BUSD holdings will likely seek redemptions.
Whether this will put other stablecoins in the regulatory crosshairs is yet to be seen. But what we do know is that stablecoins play a critical role in current market dynamics and when they are put under scrutiny, they not only shake the foundations of how trading is facilitated in the crypto market but also eradicate liquidity and ultimately market capitalization when they are forced to wind down and issue redemptions.
They can also have a significant knock-on effect on major players in the industry. Binance experienced a net outflow of $356 million in the past day, with users withdrawing heavily following the Paxos news. This comes despite the company emphasizing that BUSD is entirely owned by Paxos and that the name only appears on the coin as a licensed brand.
BNB, Binance’s native token, has dropped from $320 to roughly $296 at the time of writing. This represents roughly $3.2 billion being shed from their market cap in the space of 48 hours. Coinglass reported that leveraged BNB traders experienced liquidations worth $2.09 million overnight.
The introduction of stablecoin sanctions could have a cascading effect that sends shockwaves throughout the cryptocurrency market. From trading to market cap to the entire stability of the industry, regulatory scrutiny surrounding stablecoins could lead to very unstable conditions. As for the current market dynamics, stablecoins have become too embedded in the marketplace infrastructure to remove the vast risk associated with their potential demise.