Unstable Coins: Unanchoring, Banking Runs, and Other Looming Risks
Stablecoins are entering a period of great uncertainty after the United States Securities and Exchange Commission labeled BUSD an “unregistered security” and ordered Paxos to stop creating new tokens.
Do these moves signal a broader war by US regulators against stablecoins? Could the SEC report all stablecoins, or is BUSD a special case?
Freelance crypto journalist Amy Castor, who has been covering crypto since 2016, thinks the BUSD crackdown is directly targeting the world's largest crypto exchange, Binance:
“Attacking the BUSD issued by Paxos is part of a much larger crackdown on crypto. They are attacking the jugular and planning to cut off the blood supply.”
She continues, "They want to kill BUSD because BUSD is essential for Binance, which is the largest offshore crypto casino. Binance automatically converts every US dollar and every stablecoin to BUSD (the pegged version). Now, they'll have to find something else to automatically convert to...probably Tether. So maybe the authorities will target Tether next, something that's been a long time coming."
Even before these BUSD regulatory actions, various indicators were showing a large stablecoin buyback between September 2022 and February 2023. Could a bank rushing buybacks lead to a large stablecoin unpeg event? Some think so, pointing to the convoluted cash reserves held by stablecoins, the need for third-party audits, and the difficult relationship between stablecoins and the US Treasury.
So how stable are stablecoins?
A stablecoin is just a token tied to the value of an asset, algorithm, or fiat currency. They are hugely popular as de facto working capital for traders or as a safe haven for cashing in, with the total value settled using stablecoins last year at $7 trillion - that's more than MasterCard.
As of February 10, the three major dollar-denominated fiat stablecoins (USDT, USDC, and BUSD) accounted for nearly 12% of the total crypto market capitalization and 91.58% of the total coin supply stable.
Since the US dollar is the world's reserve currency, stablecoins gravitate towards it like an anchor, but it are other categories. Asset-backed stablecoins use real-world assets, such as gold, as collateral to maintain stable price levels, as with Paxos' PAXG.
Stablecoins backed by baskets of cryptocurrencies are backed by other cryptocurrencies and stablecoins, which may themselves be backed by assets or fiat. MakerDAO's Dai invented this model. Dai is an algo-stablecoin backed by various other stablecoins, Ether and Wrapped Bitcoin.
The most controversial algorithmic stablecoins combine a decentralized minting mechanism with economic incentives to keep them pegged to a target value, usually the dollar. Automated processes - in theory - keep their value close to this goal. Clearly still experimental, pricing algorithms allow traders to mint and burn coins as needed to maintain their price.
As of May 2022, Terra's algorithmic stablecoin, UST, due to its circular dependency design. Several wallets have exploited vulnerabilities in the Terra ecosystem and its automated procedures. The UST stablecoin – and its collateral token, LUNA – crashed, dragging the market into another winter.
The bad news is that fiat-backed stablecoins can also disappear during a bank run.
Stablecoins are entering a period of great uncertainty after the United States Securities and Exchange Commission labeled BUSD an “unregistered security” and ordered Paxos to stop creating new tokens.
Do these moves signal a broader war by US regulators against stablecoins? Could the SEC report all stablecoins, or is BUSD a special case?
Freelance crypto journalist Amy Castor, who has been covering crypto since 2016, thinks the BUSD crackdown is directly targeting the world's largest crypto exchange, Binance:
“Attacking the BUSD issued by Paxos is part of a much larger crackdown on crypto. They are attacking the jugular and planning to cut off the blood supply.”
She continues, "They want to kill BUSD because BUSD is essential for Binance, which is the largest offshore crypto casino. Binance automatically converts every US dollar and every stablecoin to BUSD (the pegged version). Now, they'll have to find something else to automatically convert to...probably Tether. So maybe the authorities will target Tether next, something that's been a long time coming."
Even before these BUSD regulatory actions, various indicators were showing a large stablecoin buyback between September 2022 and February 2023. Could a bank rushing buybacks lead to a large stablecoin unpeg event? Some think so, pointing to the convoluted cash reserves held by stablecoins, the need for third-party audits, and the difficult relationship between stablecoins and the US Treasury.
So how stable are stablecoins?
A stablecoin is just a token tied to the value of an asset, algorithm, or fiat currency. They are hugely popular as de facto working capital for traders or as a safe haven for cashing in, with the total value settled using stablecoins last year at $7 trillion - that's more than MasterCard.
As of February 10, the three major dollar-denominated fiat stablecoins (USDT, USDC, and BUSD) accounted for nearly 12% of the total crypto market capitalization and 91.58% of the total coin supply stable.
Since the US dollar is the world's reserve currency, stablecoins gravitate towards it like an anchor, but it are other categories. Asset-backed stablecoins use real-world assets, such as gold, as collateral to maintain stable price levels, as with Paxos' PAXG.
Stablecoins backed by baskets of cryptocurrencies are backed by other cryptocurrencies and stablecoins, which may themselves be backed by assets or fiat. MakerDAO's Dai invented this model. Dai is an algo-stablecoin backed by various other stablecoins, Ether and Wrapped Bitcoin.
The most controversial algorithmic stablecoins combine a decentralized minting mechanism with economic incentives to keep them pegged to a target value, usually the dollar. Automated processes - in theory - keep their value close to this goal. Clearly still experimental, pricing algorithms allow traders to mint and burn coins as needed to maintain their price.
As of May 2022, Terra's algorithmic stablecoin, UST, due to its circular dependency design. Several wallets have exploited vulnerabilities in the Terra ecosystem and its automated procedures. The UST stablecoin – and its collateral token, LUNA – crashed, dragging the market into another winter.
The bad news is that fiat-backed stablecoins can also disappear during a bank run.
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