When the FTX crypto exchange collapsed last year, the focus turned to the biggest exchange, Binance. People worried about the amount of the Binance USD (BUSD) stablecoin that the exchange holds because they thought it was self-issued. That’s not entirely correct. Binance outsources the issuance of BUSD to New York-regulated trust company Paxos, which has a conservative approach towards reserve assets, holding them in cash or Treasuries.
However, Paxos is only responsible for BUSD issuance on Ethereum, not the four other blockchains on which BUSD is available. “The NYDFS must approve our BUSD operations, including the blockchains on which BUSD tokens may be listed,” Paxos told us via email. “Today, BUSD is approved for issuance only on Ethereum. Paxos is not involved in the management or support of wrapped versions of BUSD.” And it makes that clear on the Paxos website.
Binance issues BUSD on other chains, including its own-brand blockchain Binance Chain. Together these amount to about a third of the total issuance of BUSD. It doesn’t create it out of thin air but uses the Ethereum BUSD as the 1:1 backing asset. This wrapping of a token to make it usable on another blockchain network is commonplace in crypto, but not without risks. The obvious ones are who has keys to the wallets and how to ensure the 1:1 backing is in sync.
Non-ethereum BUSD stablecoin wasn’t always 100% backed
It turns out that BUSD on other chains was not always 1:1 backed in the past, although Binance said it rectified the process last year. It claimed the issues were a timing difference and it now rebalances more regularly.
Binance locks BUSD on Ethereum in a specific wallet and issues the BUSD on the other chains, with Binance Chain making up most of it. Currently, this ‘Binance-peg BUSD’ accounts for $5.44 billion, a third of the total $16.3 billion on the Ethereum chain.
In the blog post about the mismatch of the backing assets, Binance refers to the BUSD issued on the other chains as Binance-Peg BUSD or PBUSD. But on the blockchains themselves, they appear as BUSD. The same branding as on the Ethereum chain.
Blockchain explorers have a disclaimer for BUSD that it is pegged BUSD. “It is not issued by Paxos nor regulated by the NYDFS,” reads the disclaimer. But how many people will view the explorer, especially if they hold stablecoins on an exchange?
BUSD is not the only stablecoin where the core issuer is not responsible for issuance on all chains.
USDC is another example where the stablecoin on the popular Polygon blockchain is bridged. However this only accounts for around 2% of USDC’s $41 billion issuance. The issuer of USDC, Circle, provides Bridged USDC terms of service allowing those with a Circle Account to redeem the Polygon USDC for dollars.
However, Binance also wraps almost $900 million USDC on the Binance Chain, which is not directly covered by Circle’s terms of service.
Using the same brand when there are different risks results in potential consumer misconceptions because they don’t appreciate the difference.
What’s the solution?
There’s a vast difference in trustworthiness between an issuer that’s a regulated trust company such as Paxos and an unregulated blockchain startup that decided to wrap tokens. For all we know, the startup might leave the wallet keys available to all staff on Slack. Allegedly FTX did something similar.
Wrapped Bitcoins are tradable on the Ethereum network. The symbol is not BTC. It is wBTC. So an obvious solution is a branding indicator for wrapped stablecoins rather than an obscure disclaimer that a user might never see. So ‘Binance-Peg BUSD’ should be something like wBUSD or pBUSD. The same goes for bridged USDC.
Whether or not that will make a difference remains to be seen. After all, Tether remains the most popular stablecoin despite evidence that it has not been fully backed at all times.
Fiat-backed stablecoins are meant to be lower risk tokens, so there’s a need to be more conservative. It’s generally accepted that issuers need to be regulated. But what about organizations that wrap stablecoins? It’s still possible to achieve composability, such as creating programmable money based on stablecoins without handing over keys to large quantities of digital currency.
In other related news, there are reports that one of the Paxos regulators, the New York State Department of Financial Services (NYDFS), is probing Paxos. However, an NYDFS spokesperson told Bloomberg that it keeps in contact with regulated entities to understand crypto market risks.
Stablecoin fragmentation beyond wrapping
Apart from multi-chain issuance, there’s additional potential for fragmentation within a brand. There could be multiple issuers of the same brand of stablecoin on the same chain. Or the same parent company might issue the stablecoin in multiple jurisdictions.
USDC is associated with issuer Circle, but the USDC stablecoin is governed by Centre, which originally planned multiple issuers for USDC. With different entities issuing the same brand of stablecoin, the issuers will always have different risk profiles.
Singapore regulators plan to incorporate some international supervision where a stablecoin is issued in multiple jurisdictions, even if by the same entity.
As we’ve seen with Europe’s MiCA regulations, the crypto-asset sector moves quickly and it’s hard for regulations to keep up. With stablecoin rules in the works in several jurisdictions, there’s a need to consider wrapped stablecoins and other ways in which same-brand stablecoins carry different risks.