Stablecoin Market Set for a New Order After Paxos Investigation?

Tether's USDT may see significant gains as Paxos halts the issuance of BUSD and faces potential action from the leading U.S. securities regulator.

Image: Blockworks

Stablecoin Market Reordering?

As reported by Coin68 in the early hours of February 13, the SEC announced its intention to sue Paxos over allegations that BUSD constitutes an unregistered security. Later that day, the New York Department of Financial Services (NYDFS) instructed Paxos to stop issuing BUSD, the stablecoin associated with Binance. These developments have stirred panic in the community and triggered a sharp market sell-off.

Paxos’ decision to halt new mints has rocked the $136 billion stablecoin market. Analysts are predicting that market share will soon shift to Tether’s USDT and Circle’s USDC, with the latter being the organization that flagged Paxos to New York regulators. Additionally, MakerDAO’s DAI is also viewed as a strong contender.

Binance, the world’s largest crypto exchange by trading volume, had heavily invested in promoting BUSD on its platform. In September of the previous year, Binance aggressively removed USDC trading pairs and fully transitioned to BUSD to bolster its own stablecoin. This move quickly propelled BUSD to become the third-largest stablecoin by market cap, with a valuation of $35 billion and accounting for 35% of Binance's massive trading volume.

Binance CEO Changpeng Zhao has stated that with the halt on new BUSD issuance, its market cap will likely decline over time, but the exchange will continue to support BUSD as usual. However, a classification of BUSD as a security could have significant legal implications for the crypto industry.

With ongoing crackdowns from both New York and the SEC, competitors are positioning themselves to capture market share.

USDT currently holds the top spot as the largest stablecoin with approximately $69 billion in circulation, followed by USDC with $41 billion. DAI’s market cap stands around $5 billion. According to TRON founder Justin Sun, around $1 billion worth of USDT was newly minted by Tether Treasury approximately 11 hours ago.

Clara Medalie, Research Director at digital asset analytics firm Kaiko, commented:

“Paxos’ decision will profoundly alter the stablecoin landscape and disrupt Binance’s global dominance strategy in the crypto sector.”

Leena ElDeeb, a representative from 21.co, noted in an email:

“The headwind will lead to consolidation in the stablecoin market, favoring blue-chip coins like USDT and USDC. Tether is likely to emerge as the winner, as we are witnessing millions of dollars flowing into USDT on Binance.”

Medalie added that USDC is gaining momentum with the absence of BUSD, and it will be interesting to see if Binance re-lists this stablecoin. However, there are concerns that Circle may be the next target of the SEC.

What’s Next for Binance?

Since Binance exclusively branded itself with BUSD, Paxos’ decision may only impact the exchange’s finances.

Conor Ryder, a research analyst at Kaiko, stated about Binance:

“These decisions may not significantly affect their business operations. The primary damage is to their reputation, especially since they have removed USDC and other stablecoins.”

However, recent events are not the end of Binance’s stablecoin ambitions.

“Binance may seek another issuer for BUSD or explore a more optimal solution. There are still many variables in play, but for now, we hope investors do not rush to withdraw their BUSD.”

Users Abandon BUSD Amidst Recent Turmoil

According to announcements, investors can convert BUSD to USD or USDP until February 2024. Nevertheless, this hasn’t prevented a massive withdrawal wave from Binance. Over the past 24 hours, the community has started moving away from BUSD in favor of other stablecoins.

The 24-hour spot trading volume for the BUSD/USDT pair reached $3.2 billion, marking the highest daily trading volume since the FTX collapse.

24-Hour Spot Trading Volume for BUSD/USDT Hits $3.2 Billion

The largest BUSD pool on Curve is nearly depleted of USDT, USDC, and DAI. 82% of the liquidity in the pool is BUSD. At the current exchange rate, 10,000 BUSD converts to only 9,982 USDT.

85% of Liquidity in Curve Pool is BUSD

Blockchain data from Nansen shows that Paxos Treasury has transferred approximately $275 million BUSD to a burn address, removing those tokens from circulation.

Paxos Treasury Transfers $275 Million BUSD to Burn Address