Paxos Will No Longer Issue BUSD. What Does That Mean for DeFi?

More projects may leave the US for jurisdictions that are more open to innovation, Ume CEO Brent Xu told Blockworks

article-image

Skorzewiak/Shutterstock.com modified by Blockworks

share

DeFi has encountered another hiccup — BUSD, one of the largest stablecoins in its ecosystem, will cease issuance. 

The move stems from a decision made by the New York Department of Financial Services (NYDFS).

USD-pegged stablecoins drive the decentralized finance (DeFi) ecosystem. USDT is currently the largest stablecoin provider, making up a little over 50% of total stablecoin market capitalization — followed by USDC, then BUSD.

All three stablecoins happen to be operated by centralized entities, meaning they’ve been drawn under increasing regulatory scrutiny. It’s been elevated, at least to an extent, to an existential stablecoin threat, in some cases. 

Binance on the heels of the news has booked over $1 billion in outflows of its native BUSD — equating to almost 6% of reserves, Andrew Thurman, a researcher at Nansen, told Blockworks. 

“Of the roughly 16 billion BUSD in circulation, about 87% of it is on centralized exchanges, and 97% of that is on Binance directly,” Thurman said.

Brent Xu, chief executive and co-founder of Umee — a Web3 bond platform for generating DeFi utility — told Blockworks that the recent sector happenings are an “alarming development for the stablecoin industry and, in turn, decentralized finance.” 

“DeFi relies heavily on a variety of USD-pegged stablecoins,” Xu said. “If more and more stablecoins are prevented from interacting with the crypto ecosystem, then, in the short term, DeFi will undoubtedly be impacted. We’ll likely see more projects move offshore and into jurisdictions that are more open to innovation.”

The latest crackdown on BUSD, according to Xu, highlights the necessity of stablecoins that are not controlled by centralized entities.

“Though difficult to bootstrap the markets, decentralized stablecoins like DAI and other variations of these overcollateralized stablecoins will need to become the norm as fiat tokenization encounters more regulatory scrutiny,” he said.

Luckily, BUSD — in comparison to USDT and USDC — has relatively limited reach outside of its namesake exchange, Thurman said.

“Aave, the largest DeFi money market, has only $11.5 million in BUSD collateral deposits – just a fraction of Aave’s $6.95 billion TVL, and dwarfed by USDC’s $803 million in deposits,” he said. “While the enforcement has massive ramifications for Binance, the effect on DeFi looks muted at the moment.”

The only concern, according to Thurman, has now become the potential for a broader crackdown on stablecoins.

The latest developments, though, should not come as a surprise, according to Zaki Manian,  the co-founder of Sommelier. 

“What doesn’t come as a surprise is that the SEC is coming after Binance…I expect that regulatory pressure will continue as the commission continues this push to crack down on centralized actors in crypto and assert itself as the primary regulator of the space,” Manian said.

As regulators continue to crack down on cryptocurrencies, Xu said it’s important for the industry’s players to work with lawmakers to shape emerging rules set to govern it. Innovation and user protection are two key areas that Xu said he’s eying. 

“This would be of benefit to economic growth and innovation in the United States,” he said.


Don’t miss the next big story – join our free daily newsletter.

Tags

Upcoming Events

Hilton Metropole | 225 Edgware Rd, London

Mon - Wed, March 18 - 20, 2024

Crypto’s premier institutional conference returns to London in March 2024. The DAS: London Experience: Attend expert-led panel discussions and fireside chats Hear the latest developments regarding the crypto and digital asset regulatory environment directly from policymakers and experts.

HYATT REGENCY SALT LAKE CITY

TUES, OCT. 8, 2024

Guided by the expertise of Blockworks Research Analysts team, this one day event will feature senior leaders, entrepreneurs, and developers from across the crypto industry. Attendees will have the opportunity to participate in an immersive experience to explore the latest trends, […]

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 graphics (1).jpg

Research

Wormhole is a suite of open-source, permissionless protocols used to move assets and queries across blockchains.  Despite being a common misconception, Wormhole is not just a token bridge. Nevertheless, protocols can build token bridges on top of Wormhole by leveraging the cross-chain messaging provided.

article-image

Ether is a commodity just up until the point it is not, or, ether is not a commodity just up until the point it is — whichever you prefer

article-image

The bull-market conference was filled with good feelings but little clarity on where the crypto industry is headed next

article-image

The Friday ruling was issued as a default judgment because Sameer Ramani “appears to have fled the country”

article-image

Bitcoin’s previous record high against the Euro was set in September 2021

article-image

As bitcoin ETFs grow larger and more liquid, due diligence teams at wirehouses and other investment firms are more likely to clear them, Bitwise researcher says

article-image

Sponsored

The TRON DAO team attended ETH Denver, one of the leading events in the blockchain space