How Hard is it for Stablecoin Issuers To Cash Out Billions?

US government debt is considered as highly liquid assets leaving little doubt about Paxos’ ability to meet an influx of redemptions on BUSD, analysts say

article-image

Blockworks Exclusive Art by Axel Rangel

share

Stablecoin issuer Paxos Trust, under pressure from US regulators, must be able to honor potentially billions in redemptions in the year ahead.

That raises questions about whether the firm — and, for that matter, other issuers — can meet such large requests from users seeking to pull their money from crypto ecosystems without a hitch. 

Paxos announced on Feb. 13 that it was halting its minting of BUSD, the Binance-branded stablecoin, amid allegations it violated investor protection laws. 

The company received a Wells Notice from the US Securities and Exchange Commission and had been ordered to cease minting new BUSD by the New York Department of Financial Services.

Industry insiders are concerned about the SEC’s lack of clarity on Paxos’ stablecoins and similar USD-based digital coins, Jeff Yew, founder of digital asset manager Monochrome told Blockworks.

“This uncertainty to holders and businesses who rely on such products will need to be addressed eventually,” Yew said.

Paxos did not immediately respond to a request for comment, but its CEO, Charles Cascarilla, in an email sent to employees last week, said the decision to end the firm’s relationship with Binance was made because it “no longer aligns with our current strategic priorities,” and “was separate from the Wells Notice and the DFS directive.”

Since 2019, Paxos has been responsible for the issuance and redemption of BUSD through a license agreement with Binance. Paxos has confirmed that it will continue to fully support BUSD and offer redemption options to its customers until at least February 2024.

Stablecoins issued under Paxos’ own brand remain unaffected, a spokesperson previously confirmed to Blockworks.

In BUSD’s case, there does not seem to be any technical barrier to redeeming USD, Yew added, although the process and hurdles of stablecoin redemption often lead to holders choosing to swap their holdings into another stablecoin.

Binance CEO Changpeng Zhao the CEO expressed on Twitter his anticipation of users transitioning away from BUSD to alternative stablecoins on the exchange platform “over time.” 

Latest attestation figures

According to Paxos’s Feb. 21 attestation, BUSD had a total token outstanding of $12.43 billion, with a weighted average maturity of 3 days. The stablecoin is backed by a range of US Treasury Bills and US Treasury Debt, totaling $12.66 billion in current market value.

William Fong, Treasurer at Australian trading firm Zerocap told Blockworks obtaining the necessary liquidity to meet redemption obligations is comparable to how central banks handle the fluctuating exchange rate of their foreign currency reserves.

“That means if there is more outflow to the domestic currency versus a foreign currency, or if the economy runs a large current account and trade deficit, there is pressure for investors to sell the ‘stablecoin’ and buy ‘USD,’” Fong said.

When participants buy stablecoins, they expect to be able to sell them back for the same amount of money later on. Sometimes, individuals want to sell more stablecoins than there are buyers for. 

This can happen if people start to lose faith in the asset, or if they need to use their money for something else entirely. In that instance, the stablecoin issuer needs to come up with enough money to buy back all the coins that people want to sell. 

Issuers typically do this by offloading some of the assets that they have in reserves, like government bonds or cash.

The fixed-income market is worth roughly $120 trillion, which means secondary liquidity is more than enough to meet the stablecoin realization requirements, even on short notice, Fong said.

 Zhong Yang Chan, head of research at CoinGecko agreed. 

“T-bills are very liquid instruments. Paxos could just sell those T-bills in the market.”

Rival stablecoin issuer Tether made its decision to eliminate commercial paper from its stablecoin reserves, replacing them entirely with US Treasury bills last year, in a bid to boost transparency and the security around users’ funds.

US Treasury securities record an average daily volume of around $615 billion, according to the Securities Industry and Financial Markets Association.

Trouble starts when issuers have mostly risky or illiquid assets backing up the stablecoin, the analysts said. It can be hard for issuers to get enough money to buy back all the stablecoins people want to sell. 

That could eventually cause the value of a given stablecoin to drop, forcing certain issuers to take a haircut to meet daily redemptions.

Thus, the prevailing consensus around reserves has evolved, shifting away from a basket of riskier assets to those considered more stable.


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Salt Lake City, UT

MON - TUES, OCT. 7 - 8, 2023

Blockworks and Bankless in collaboration with buidlbox are excited to announce the second installment of the Permissionless Hackathon – taking place October 7-8 in Salt Lake City, Utah. We’ve partnered with buidlbox to bring together the brightest minds in crypto for […]

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Research Report Cover Vertex.jpg

Research

The proliferation of new perp DEXs has led to fragmented liquidity across various DEXs and chains. Vertex, known for its vertically-integrated DEX that includes spot, perpetual, and integrated money markets, is now tackling cross-chain liquidity fragmentation through horizontal integration with the launch of new Edge instances. Vertex's integrated offerings and cross-margined account structure amplify the benefits of new instances: native cross-chain spot trading, optimized cross-chain basis trading, consistent interest rates, reduced bridging friction, and more.

article-image

Plus, a dive into crypto’s ever-expanding unicorn club

article-image

Also, tokenization continues to grab headlines and one bitcoin miner stock soars Tuesday after inking a big deal

article-image

Fifteen million daily failed transactions disappeared from Solana

article-image

FTX debtors will pay the IRS $200M, with an outstanding lower priority claim of $685M

article-image

I’ve come to the realization that more attention is needed to create and sculpt the digital spaces where we live

article-image

The NYSE went down yesterday after a glitch caused a string of erroneous trades. Does DeFi fix this?