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

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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.


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