While the cryptocurrency industry has been on regulators’ radar over the past years, including major exchanges like Binance, the most targeted aspect is stablecoins. Following the recent saga between Paxos, the issuer of the Binance branded stablecoin BUSD, and the Security Exchange Commission (SEC), the stablecoin market has been bewildered. Investors sought the safest-backed stablecoin to save their funds.
According to Binance Chief Executive Officer (CEO) Changpeng Zhao, popularly known as “CZ,” the cryptocurrency industry may soon evolve away from the ubiquitous dollar-backed stablecoin era to stablecoins that are algorithmically backed by other assets.
Crypto Industry To Move To Other Real Word-Backed Currency?
Following the tightening regulation around USD-backed stablecoins, the crypto industry is now looking for other alternatives. As Bitcoinist reported, the U.S. Securities and Exchange Commission (SEC) has increased its actions against crypto companies, such as Paxos and crypto exchange Kraken.
CZ said in a Twitter Space Q&A on Tuesday:
The amount of pressure put on stablecoins is quite significant. Multiple agencies are applying pressure there. That will shrink the USD stablecoin market, so the industry is exploring its options.
Stablecoins are less volatile digital assets backed by fiat currency. Investors use it to reduce their exposure to volatility. Over the past years, stablecoins backed with the United States dollar have been the most popular. The dollar-backed stablecoin accounts for nearly all of the stablecoin market.
Though stablecoins backed by fiat currency, such as Euros, exist, the dollar-backed market is still the most dominant. Tether USDT, USD Coin, BUSD, and DAI account for more than 10% of the global cryptocurrency market capitalization.
However, as regulators are beginning to be laser-focused on the regulation of dollar-backed stablecoin, CZ believes the industry could see the emergence of other assets and even algorithmic-backed stablecoin. CZ noted, “I think we’ll see more euro- or other, Japanese yen, Singapore dollar-based stablecoins.”
Algorithmic stablecoins are assets that leverage complex computing combinations and trader incentives to maintain their pegs of one-to-one to assets such as the dollar. An example of this type of stablecoin was Terra’s UST, the digital assets that collapsed in 2022, leading to an acceleration of the crypto bear market.
Terra’s UST crash was triggered by a cascade of redemption which led to a massive run on the bank on the asset. This aggressive redemption process eventually led to UST’s collapse. The algorithm stablecoin failed to maintain the one-to-one balance on the asset. According to CZ:
The regulatory crackdown around stablecoins likely was triggered partly by the collapse of the Terra Luna algorithmic stablecoin in May.
SEC Orders Paxos To Halt The Issuance of BUSD
Earlier this week, the New York State Department of Financial Services ordered Paxos Trust Co. to halt the issuance of BUSD, the third-largest stablecoin in the cryptocurrency market. According to recent reports, Paxos will end its connections with Binance and cease the distribution of BUSD by February 21.
Paxos will still support BUSD for the next 12 months despite the breakup. According to CZ, Paxos only halted the issuance of new tokens. “The fact that it’s an orderly wind-down is a good thing. People holding stablecoins shouldn’t lose any value,” CZ noted.
Notably, CZ has always clarified Binance’s unique connection with BUSD stablecoin. The CEO stated that BUSD wasn’t his or his team’s idea but something created by Paxos. Speaking of Binance, the exchange’s native token, Binance Coin (BNB), has been struggling to hold its ground amid these happenings.
At the time of writing, BNB is up 3.6% in the last 24 hours after being down 9% in the past seven days. Its current market price still sits well above $250, and it is looking to break the $300 mark again.
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