This article is part of a series analyzing stablecoins pegged to the United States Dollar (USD). Are all stablecoins equally stable? In the coming weeks, I plan to analyze and rank each of the main stablecoins in the crypto ecosystem, in terms of stability. This article is a review of the main stablecoin of the Binance Smart Chain, the Binance USD (BUSD)
Before I go into the details of how stablecoins works, please note that I am an educator by profession, not a financial advisor. The purpose of this article is to provide you with information, not financial advice, so you can learn about BUSD. Please supplement this article with your own research - DYOR. Also note, that depending on when you read this article, some of the information may be out of date.
All images in this article are either from the Wikimedia Commons, of my own creation, or can be found in the links at the end of this article.
A. What is a Stablecoin?
If you are uncertain about what a stablecoin is, or you would like a little more background about the function they serve, please read my introductory article about stablecoins below:
2. Origins of BUSD
BUSD originated due to a partnership between Binance and the Paxos Trust Company (Paxos). Paxos is a New York-based financial institution and technology company, focused on digital assets, which was founded in 2012. Previous to the construction of BUSD, Paxos managed (and still manages) its own digital stablecoin, PAX. Binance and Paxos announced a partnership in June 26, 2019, which brought the PAX stablecoin to their Binance Exchange.
One imagines that Binance must have liked what they saw in the Paxos partnership and stablecoin, and the stability and regulation behind PAX. Less than four months later, on September 4th, 2019, Binance and PAX announced a new partnership in creating a new USD-denominated stablecoin, Binance USD (BUSD). It can be traded on the Ethereum chain, the Binance Smart Chain (more on that later), and as a result is compatible with most wallets on the market.
PAX and BUSD function, and are governed, in much the same way. Although the work "Binance" is in "Binance USD", it is Paxos who manages the collateralization of BUSD.
3. Is BUSD Fully Collateralized?
BUSD is approved and regulated by the New York State Department of Financial Services (NYDFS). These accounts are audited on a monthly basis by Withum, a nationally top-ranking auditing firm, to ensure that the amount of capital on hand matches the amount of BUSD in circulation. These monthly attestation reports can be viewed on the Paxos website, and be traced all the way back to the inception of BUSD.
How do they manage to match the price of BUSD:USD on a 1:1 basis? Whenever a user purchases 1 BUSD, a coin is minted, and that dollar is added to the reserve fund. If 1 BUSD is cashed in for 1 USD, then the USD is paid out, and that 1 BUSD is burned.
A. Can I exchange my BUSD for USD, outside of an exchange?
First, for practical purposes, this answer "Doesn't Matter" to us. For a coin with a high market cap such as BUSD, it can be traded regularly in many different exchanges globally, and many local cryptocurrency exchanges will offer some way to exchange it for fiat currency. But, if BUSD disappeared from every exchange tomorrow, could you get USD for it? The answer is yes.
BUSD can be purchased or redeemed on paxos.com 1:1 for US Dollars, as long as you create an account with them. With some investigation on their website, I was able to confirm that they accept BUSD for USDs on the ERC-20 (the Ethereum chain), which gives you a USD balance with Paxos. That balance can then be Wire transferred to a bank account.
Binance and Paxos don’t charge a fee for the purchase or redemption of BUSD. However, banks along the chain may charge fees.
4. Is BUSD Decentralized?
As you may have determined by the amount of regulation surrounding BUSD, it is not at all a decentralized stablecoin. It is highly centralized and regulated through Paxos.
Is this a problem? Certainly having a well-regulated stablecoin is a good thing? Well, in complying with regulations, Paxos was required to introduce "a role for asset protection to freeze or seize the assets of a criminal party when required to do so by law, including by court order or other legal process."
This is functionality that exists in all regulated stablecoins, so it is certainly not unique to BUSD. But this does reinforce that there is a trade-off between the confidence brought on by transparency and regulations, and the possible consequences that come with those regulations.
5. What is the market cap of BUSD, in comparison to other Stablecoins?
As of July 2, 2021, BUSD was the third most used stablecoin, with a market cap of 10 billion. This puts it behind only Tether (USDT) and USD Coin (USDC).
6. What are the main uses of BUSD?
Outside of its general availability and uses cases that it shares with all stablecoins, the BUSD has some specific uses in which it has dominated other stablecoins.
A. The Binance Exchange
BUSD is a prevalent trading pair with most coins and tokens listed on Binance's exchange, which is the most popular exchange by volume in the world, handling over 11 trillion (!!) dollars in daily volume.
Having BUSD help power this exchange does a number of things. First, branding - having one of your top stablecoins be the "Binance USD" not only furthers the brand, but inspires confidence in the coin. Second, in having a regulated stablecoin they had a hand in creating, Binance knows that the BUSD is fully collateralized. They do not have to worry about another stablecoin running into some sort of partial collateralization issue, and therefore interfering with the functionality of their exchange. The BUSD will always be a trading pair option for them.
B. The Binance Smart Chain
Binance launched its own blockchain, the Binance Smart Chain (BSC), in September 1, 2020. Having a stake in its own stablecoin allowed the BUSD to be the stablecoin of choice on the BSC, and be fully integrated into the platform upon launch. Thus, Binance was able to leverage its stablecoin into helping push a network to compete with Ethereum, and to grow its reach into the cryptospace even further.
7. A Comparison of Stablecoins (and other articles)
These rankings are based mainly on how reputable the coin is; i.e., how certain can we be that the coin is fully collateralized?
- I value evidence of complete collateralization above every other metric.
- Generally speaking, if two coins are equal in every way, I will rank the coin with a larger market cap higher.
- If a coin is more decentralized, but equal in other measures, I will rank it higher on the list - potentially above other coins with a higher market cap.
I will update this list as I review more stablecoins. My most recent review was the BUSD on July 2, 2021. Click the coin to see a link to my review of it.
I hope you have enjoyed this overview of the BUSD. Over time, I will be analyzing and ranking the most active stablecoins in the cryptocurrency ecosystem. If you would like to follow my research, be certain to bookmark this article, and check back weekly.
Do you have any questions on stablecoins you would like me to address? Please leave a comment ifso.
B. Next Up!
The second coin I plan to review is the USD Coin (USDC). Look for that article next week.
C. Referral Link and Tips
If you are a Canadian user, Paytrie offers a way for you purchase Stablecoins with Canadian Dollars, for a 0.6% transaction fee. It is the app I use to purchase Stablecoins to use on international exchanges and Dapps. If this interests you, please use my referral code of cK$JkcV7J, or click on the link below:
Also, if you enjoyed or learned something from this article, please leave me a tip. More tips gives me more encouragement to write and research more in the future.
Take care, and I will see you all next time!