Stablecoins of the same brand may have different risks – Ledger Insights

When the FTX crypto exchange collapsed last year, the focus turned to the largest exchange, Binance. People worried about the amount of Binance USD (BUSD) stablecoin that the exchange has because they thought it was self-issued. That’s not quite right. Binance outsources the issuance of BUSD to New York-regulated trust company Paxos, which takes a conservative approach to reserve assets, holding them in cash or government bonds.

However, Paxos is only responsible for BUSD issuance on Ethereum, not the other four blockchains on which BUSD is available. “The NYDFS must approve our BUSD operations, including the blockchains on which BUSD tokens can be listed,” Paxos told us via email. “Today, BUSD is approved for issuance only on Ethereum. Paxos is not involved in the administration or support of packaged versions of BUSD.” And it makes that clear on the Paxos website.

Binance issues BUSD on other chains, including its own-brand Binance Chain blockchain. Together, these make up about a third of the total issuance of BUSD. It doesn’t create it out of thin air, but uses Ethereum BUSD as the 1:1 backing element. This wrapping of a token to make it usable on another blockchain network is common in crypto, but not without risk. The obvious ones are who has keys to the wallet and how to ensure the 1:1 support is in sync.

The non-ethereum BUSD stablecoin was not always 100% supported

It turns out that BUSD on other chains was not always 1:1 supported previously, although Binance said it corrected the process last year. It claimed that the problems were a timing difference and that it now rebalances more regularly.

Binance locks BUSD on Ethereum in a specific wallet and issues BUSD on the other chains, with the Binance Chain making up the majority. Currently, this ‘Binance-peg BUSD’ is worth $5.44 billion, a third of the total $16.3 billion on the Ethereum chain.

In the blog post about the mismatch between the backing funds, Binance refers to BUSD issued on the other chains as Binance-Peg BUSD or PBUSD. But on the blockchains themselves, they appear as BUSD. Same branding as on the Ethereum chain.

Blockchain Explorers has a disclaimer for BUSD that it is affiliated with BUSD. “It is not issued by Paxos nor regulated by NYDFS,” the disclaimer states. But how many people want to see the explorer, especially if they have stable coins 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 represents only about 2% of the USDC’s $41 billion in issuance. The issuer of USDC, Circle, provides Bridged USDC terms of service that allow those with a Circle Account to redeem Polygon USDC for dollars.

However, Binance also deposits nearly $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 do not appreciate the difference.

What is the solution?

There is a huge difference in reliability between an issuer that is a regulated trust company like Paxos and an unregulated blockchain startup that decided to wrap tokens. For all we know, the startup could leave the wallet keys available to all employees on Slack. Apparently FTX did something similar.

Wrapped Bitcoins can be traded on the Ethereum network. The symbol is not BTC. It is wBTC. So an obvious solution is a branded indicator for wrapped stablecoins instead of an obscure disclaimer that a user might never see. So ‘Binance-Peg BUSD’ should be something like wBUSD or pBUSD. The same applies to bridged USDC.

Whether 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 supported at all times.

Fiat-backed stablecoins are meant to be lower-risk tokens, so there is a need to be more conservative. It is generally accepted that issuers must be regulated. But what about organizations that package stablecoins? It is still possible to achieve composability, such as creating programmable money based on stablecoins without handing over keys to large amounts of digital currency.

In other related news, there are reports that one of Paxos’ regulators, the New York State Department of Financial Services (NYDFS), is investigating Paxos. However, a spokesperson for the NYDFS told Bloomberg that they stay in touch with regulated entities to understand the risks in the crypto market.

Stablecoin fragmentation beyond wrapping

Apart from issuing multiple chains, there is further potential for fragmentation within a brand. There can be multiple issuers of the same brand of stablecoin in the same chain. Or the same parent company can issue stablecoins in multiple jurisdictions.

USDC is associated with issuer Circle, but the USDC stablecoin is managed 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 oversight where a stablecoin is issued in multiple jurisdictions, even if by the same entity.

As we have seen with Europe’s MiCA regulations, the crypto asset sector is moving quickly and it is difficult for the regulations to keep up. With stablecoin regulations in the works in multiple jurisdictions, there is a need to consider packaged stablecoins and other ways in which stablecoins of the same brand have different risks.