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Binance Acknowledges Past Flaws in Maintaining Stablecoin Peg Reserve - BLOOMBERG

JANUARY 11, 2023

(Bloomberg) -- Binance Holdings Ltd., the biggest cryptocurrency exchange, acknowledged past flaws in the management of its stablecoin’s reserves which at times led to more than $1 billion in missing collateral, according to one analysis.

The token, Binance-peg BUSD, is meant have a constant $1 value backed by reserves of BUSD, another stablecoin that is branded by Binance but issued and managed by a separate company, Paxos Trust. Binance signaled that the “peg,” referring to the amount of BUSD locked as collateral to support its own token, had frayed in the past but is now intact.

“The process of maintaining the backing involves many teams and has not always been flawless, which may have resulted in operational delays in the past,” a Binance spokesperson said in an email to Bloomberg News. “Recently, the process has been much improved with enhanced discrepancy checks to ensure it’s always backed 1-1.” 

Binance-peg BUSD is currently fully backed and there was no impact on Paxos’s BUSD, the spokesperson added. “Despite variances in the data, at no point were redemptions impacted for users,” they said, without specifying how long Binance-peg BUSD was undercollateralized for, or when the exchange noticed and fixed the issue.

Data compiled by Jonathan Reiter, co-founder of blockchain analytics company ChainArgos, and analyzed by Bloomberg News shows that Binance-peg BUSD was often undercollateralized between 2020 and 2021. On three separate occasions, the gap between reserves and supply surpassed $1 billion, Reiter’s calculations show. The data requires operation of a blockchain node in order to be visible publicly.

Stablecoins are intended to hold a set value, usually $1, by relying on large reserves of other assets, so investors have a dependable place to park funds in volatile crypto markets. Paxos’s BUSD, for example, uses a reserve compiled of cash and US Treasury bills. 

But some stablecoins use less traditional assets for their reserves, like cryptocurrencies, or relied on algorithms to maintain their price. The $60 billion wipeout of the TerraUSD algorithmic stablecoin ecosystem in May sowed doubts about how effectively stablecoin issuers are managing their reserves. 

Binance-peg BUSD’s value derives from BUSD, the third-largest stablecoin with a total circulation worth about $16.3 billion, according to CoinGecko data. BUSD operates on the Ethereum blockchain, and Paxos says it’s regulated by the New York State Department of Financial Services.

Binance developed Binance-peg BUSD as a version of BUSD that could operate on blockchains beyond Ethereum, including its own blockchains BNB Beacon Chain and BNB Smart Chain. It’s backed one-to-one by locked reserves of BUSD instead of US dollars, and makes up about $5.4 billion of BUSD’s total circulation.

Regulators intensified scrutiny on how stablecoin issuers support their tokens last year, as part of wider pressure for more transparency in crypto following a $2 trillion rout in digital assets since a peak in 2021. Binance has faced calls for increased clarity given its status as the world’s largest crypto exchange.

  • Read: Crypto Rules Crackdown Looms for $150 Billion Stablecoin Market

Collateral Gap

Whenever users purchase Binance-Peg BUSD, Binance purchases BUSD from Paxos and then mints the corresponding amount of new Binance-Peg BUSD tokens on the blockchain the user has selected. “The user will get their Binance-Peg BUSD, and the same value of BUSD is locked on Ethereum and backed by US dollars,” a Binance spokesperson said.

The same process is corroborated by documents published by Binance in November about how it maintains Binance-peg BUSD’s collateral.

But analysis by Reiter of the amount of Binance-peg BUSD issued on Binance’s BNB Smart Chain network showed that throughout the period, the exchange minted new Binance-peg BUSD tokens without having first locked up the equivalent amount of Paxos-issued BUSD in its Ethereum wallet to act as collateral. 

“One of the issues here is that the procedure that’s outlined in their documentation for how Binance-peg BUSD is supposed to work wasn’t followed,” said Reiter in a telephone interview on Jan. 6.

Binance woes

In developing Binance-peg BUSD, Binance expanded the operation of the token beyond the Ethereum network without being issued by Paxos and without the oversight of the New York regulator.

Paxos didn’t respond to a request for comment. In an April blog post, Paxos stressed the difference between its BUSD token and Binance-peg BUSD, saying it’s “crucial to do your research when you jump into the digital asset ecosystem.”

The revelation comes after a period of turmoil for Binance, which has struggled with increased customer withdrawals and diminished trading volumes in the wake of rival crypto exchange FTX’s collapse into bankruptcy late last year.

Customers began pulling money from Binance’s exchange in November amid a general lack of confidence in crypto platforms’ ability to safeguard customer deposits following FTX’s bankruptcy. Meanwhile BUSD’s market value has dropped about 30% from a peak of around $23.5 billion in mid-November, according to data from CoinGecko.

  • Read: Binance, Alone at the Top, Stirs ‘Too Big to Fail’ Crypto Worry

Binance’s Chief Executive Officer Changpeng Zhao has defended the exchange and said it will emerge stronger after overcoming challenges. The company has said it is seeking to shed additional light on its reserves after independent auditor Mazars, which conducted a transparency report for the exchange, said it would stop providing such services last month. 

For crypto market prices: CRYP; for top crypto news: TOP CRYPTO.

--With assistance from Dave Liedtka.

(Adds updated comment from Binance in the third paragraph to note that the token is backed rather than pegged.)


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