Binance-peg BUSD Was Insufficiently Backed From 2020 To 2021
Binance, the leading crypto exchange by trading volume, has admitted that its Binance-peg BUSD stablecoin did not have sufficient collateral backing it in the past.
According to the data compiled by Jonathan Reiter, co-founder of analytics firm ChainArgos, Binance-peg BUSD was undercollateralized from September 2020 to July 2021. The largest shortfall of $1.2B occurred on 31 July 2021.
Binance-peg BUSD is supposed to be backed 1:1 by BUSD, which is issued by Paxos Trust Company on the Ethereum blockchain and regulated by the New York Department of Financial Services.
Binance wraps BUSD into Binance-peg BUSD so that BUSD can be used on multiple blockchains aside from Ethereum, including its own Binance Smart Chain.
A Binance spokesperson told Bloomberg that when a user purchases Binance-peg BUSD, the company purchases BUSD from Paxos and subsequently mints the corresponding Binance-pegged BUSD to the selected chain.
“The user will get their Binance-peg BUSD, and the same value of BUSD is locked on Ethereum and backed by US dollars. The process of maintaining the peg involves many teams and has not always been flawless, which may have resulted in operational delays in the past,” the spokesperson said.
Binance confirmed that tokenholders were not impacted, as redemptions took place smoothly during the affected period.
However, no clarity was provided as to how long Binance-pegged BUSD remained undercollateralized and when Binance found out about and fixed the issue.
On Sept. 6, Binance said that it would delist competing stablecoins and convert users’ balances into BUSD in a bid to boost liquidity. While many criticized the move, Circle CEO Jeremy Allaire posited that it would further bolster USDC usage.
Diminishing Market Share
BUSD has witnessed a sharp decline in its total circulating supply. According to DefiLlama, BUSD supply has fallen by 30% to $16.3B in the past two months.
The declining demand for BUSD could be related to the U.S. Department of Justice reportedly looking to file charges against Binance for unlicensed money transmission, money laundering conspiracy, and criminal sanctions violations.