Fiat-backed stablecoins are by far the largest segment of the stablecoin sector by market capitalization. The three largest stablecoins are currently in the top ten coins by market capitalization – Tether’s USDT, Circle’s USDC, and Binance’s BUSD. USDT frequently outpaces Bitcoin in trading volume to become the most traded digital asset. Due to their depth of liquidity and the compliance risks associated with other types of stablecoins, fiat-backed stablecoins are of the most interest to institutional investors.
This article is part of a series of Nuant insights focusing on stablecoins. Read Part 1 here.
Editor's note:
On Monday, February 13 2023, Binance partner Paxos was instructed by US authorities to stop minting BUSD. More details are provided at the end of this article.
All fiat-backed stablecoins are issued by centralized entities. As all three stablecoins are issued 1:1 against US dollars stored in a bank, they share a similar mechanism for issuance, although the fees and specific steps involved may vary. The individual or entity must undergo KYC to allow them to deposit their US dollars with the stablecoin issuer, which will then mint the stablecoin and send it to the customer’s wallet. When the customer wants to redeem their deposit, they send the stablecoins back to the issuer, which returns the US dollars to the customer.
For BUSD, only redemptions are now possible (see the note at the end for further context).
Tether charges a fiat currency deposit fee of 0.1% and a fiat currency withdrawal fee of $1000 or 0.1% if the withdrawal exceeds $1 million. There is no tax on the deposit or withdrawal of USDT. In addition, the KYC verification fee is $150.
Creating a Circle account is free of charge, but there are various paid solutions for accepting cryptocurrencies.
Paxos, the entity that issues BUSD, does not charge a fee for withdrawing BUSD.
There are some limitations on the usability of stablecoins, as not all exchanges and venues accept all stablecoins. For example, Coinbase only supports USDC, but not USDT or BUSD. In a similar vein, Binance announced last year that it would cease supporting USDC, although it will now be forced to reverse this decision in light of the viability of BUSD. Similarly, support on DeFi platforms also varies depending on the protocol or application.
Therefore, the intended trading purpose of the stablecoin will have a bearing on the decision of which one to use.
The risks of centralized stablecoins fall into two key areas: reserves, which must be both transparent and secure enough to maintain the stablecoin peg, and regulatory risk.
Each stablecoin-issuing company publishes reports and third-party audits showing proof of their reserves.
Tether has a real-time dashboard of the USDT supply on each blockchain. They also publish independent reports from auditing firms BDO and MHA Cayman on the composition of their reserves, but there is still no fully transparent and high-quality monthly report to prove the total amount of USDT in circulation across all platforms.
Circle publishes monthly reports certified by Grant Thornton, a leading global accounting firm.
Paxos publishes a monthly report on the composition of BUSD reserves and a monthly attestation by WithumSmith+Brown, PC, an independent third-party accounting firm.
The composition of reserves has become a major topic for centralized stablecoins, mainly thanks to ongoing controversy surrounding the composition of Tether’s (USDT) reserves. In 2019, following some controversy regarding a legal ruling against Tether’s sibling company Bitfinex, reports emerged that part of the reserves backing USDT was made up of debt owed by Bitfinex to Tether.
While not fatal, the reputational damage to Tether at the time was sufficient to make transparency a competitive advantage for stablecoin issuers, and independent audits have become the norm. Introducing transparency also means that stablecoin users have the opportunity to scrutinize the composition of reserves, and raise legitimate questions about their stability.
USDC and BUSD are backed 1:1 by a combination of cash and US Treasury securities, either bills or debt. However, the composition of the USDT has always remained more diversified with the presence of corporate bonds or money market funds introducing an element of risk. In October 2022, Tether took the step of reducing its commercial paper exposure, which was close to $8.5 billion at the time, to zero, replacing it with US Treasury bills.
Up until February 2023, BUSD had been issued by Paxos on Ethereum and authorized by the New York State Department of Financial Services. However, the regulator ordered Paxos to cease issuing BUSD due to the fact that Binance had issued a so-called “Binance-peg” version of BUSD, which was ostensibly backed by reserves held by Binance. The trading firm has previously acknowledged gaps in its stablecoin reserves.
Most jurisdictions do not have a comprehensive framework for regulating stablecoins. Therefore, their regulatory status is somewhat uncertain. Circle and Tether are registered with FinCEN. Circle is also regulated as a money transmitter by US state law. Paxos is under the purview of the New York State financial regulator. Although Paxos is no longer minting BUSD, existing BUSD can be redeemed for USDP, Paxos’ other regulated stablecoin.
Although they currently exist in a regulatory gray area, stablecoins will inevitably become regulated in the future as their pivotal role in the crypto-asset ecosystem comes under increasing scrutiny. The EU’s upcoming Markets in Crypto Assets (MiCA) regulation contains a specific class for “asset-referenced tokens” while in the US, Senate Banking Committee Member Pat Toomey has tabled the “Stablecoin Transparency of Reserves and Uniform Safe Transactions (TRUST) Act,” which will be the first Senate bill to establish a comprehensive regulatory framework for payment stablecoins.
Looking into the future, the development of central bank digital currencies (CBDCs) could prove to be one of the biggest existential challenges to stablecoins, as a digital fiat currency could potentially negate a significant part of their utility and appeal.
The fact that stablecoins are not usable across all major exchanges, along with the need to diversify risk, means that portfolio and crypto fund managers are often left trying to juggle multiple wallets, exchange accounts, and custody providers. Having a comprehensive overview of the portfolio is essential to timely decision making and credibility. Thankfully, Nuant has you covered. Our intuitive portfolio management system integrates your entire portfolio into one unified interface, allowing you to carry out real-time analytics on your holdings, automated risk assessments on counterparty wallets, and set up alerts so you never miss an opportunity. Register today for our early release coming very soon.
On February 13, 2023, Paxos Trust Company, which issues BUSD on behalf of Binance, announced it will no longer mint any new BUSD. The announcement came after the New York Department of Financial Services ordered Paxos to end its relationship with Binance after citing concerns about a non-authorized version of BUSD issued by Binance.
Paxos will allow new and existing customers to redeem BUSD 1:1 in exchange for US dollars or USDP, a regulated, dollar-backed stablecoin also issued by Paxos.
At the time of the announcement, BUSD had a market capitalization around $16 billion. In the two days following the announcement, BUSD was struggling to maintain its peg, trading between $0.99 and $1, and lost around $1 billion in liquidity, while the market capitalization of the other two major stablecoins, USDT and USDC, had increased accordingly.
However, it’s important to note that no dramatic de-pegging of BUSD occurred on the news, and given Paxos’ commitment to redeeming BUSD 1:1, it seems unlikely that one will occur. Nevertheless, BUSD will continue to lose market capitalization as holders redeem their allocations in favor of more sustainable options.
Since the announcement, Binance has sought to distance itself from BUSD and its CEO, Changpeng Zhao, has stated his firm will expand its support for other stablecoins.
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Singh, Manish, (September 6, 2022), “Binance to stop supporting USDC, the second largest stablecoin,” TechCrunch. Available at: https://techcrunch.com/2022/09/05/binance-issuer-of-stablecoin-busd-to-discontinue-support-for-usdc-usdp-and-tusd/
Malwa, Shaurya, (February 15, 2023), “BUSD Stablecoin Inches Toward $1 Peg After Binance CEO Comments,” Coindesk. Available at: https://www.coindesk.com/markets/2023/02/15/busd-stablecoin-inches-toward-1-peg-after-binance-ceo-comments/
Tether, (2023), “Transparency.” Available at: https://tether.to/en/transparency/#reports
Circle, (2023), “Our commitment to transparency.” Available at: https://www.circle.com/en/transparency#stability
Paxos, (2023), “Binance USD (BUSD) Transparency Reports.” Available at: https://paxos.com/busd-transparency/
De, Nikhilesh, (April 30, 2019), “Tether Lawyer Admits Stablecoin Now 74% Backed by Cash and Equivalents,” Coindesk. Available at: https://www.coindesk.com/markets/2019/04/30/tether-lawyer-admits-stablecoin-now-74-backed-by-cash-and-equivalents/
Bourgi, Sam, (October 13, 2022), “Tether reduces commercial paper exposure to zero, replaces investments with T-Bills,” Cointelegraph. Available at: https://cointelegraph.com/news/tether-reduces-commercial-paper-exposure-to-zero-replaces-investments-with-t-bills
Nicolle, Emily, Shen, Muyao, (January 10, 2023), “Binance Acknowledges Past Flaws in Maintaining Stablecoin Backing,” Bloomberg. Available at: https://www.bloomberg.com/news/articles/2023-01-10/binance-bnb-acknowledges-past-flaws-in-managing-busd-peg-stablecoin-reserves?sref=0iVJWC65
Koning, JP, (January 26, 2021), “What Tether Means When It Says It's 'Regulated',” Coindesk. Available at: https://www.coindesk.com/policy/2021/01/26/what-tether-means-when-it-says-its-regulated/
Circle Support, (2023), “Is Circle regulated?.” Available at: https://support.circle.com/hc/en-us/articles/212059046--Is-Circle-regulated-
Nuant Insights, (2022), “EU MiCA Regulation is Coming — But what will it mean for crypto funds?.” Available at: https://www.nuant.com/research/EU-MiCA-Regulation-is-coming
Ozawa, Ryan, (December 22, 2022), “Retiring U.S. Sen. Pat Toomey Introduces Stablecoin TRUST Act,” Decrypt. Available at: https://decrypt.co/117767/senator-pat-toomey-payment-stablecoin-trust-act
Paxos, (February 13, 2023), “Paxos Will Halt Minting New BUSD Tokens,” Press release via PR Newswire. Available at: https://www.prnewswire.com/news-releases/paxos-will-halt-minting-new-busd-tokens-301744964.html
New York State Department of Financial Services, (February 13, 2023), “Consumer Notice Regarding Paxos-Issued Binance USD.” Available at: https://www.dfs.ny.gov/consumers/alerts/Paxos_and_Binance
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