(Bloomberg) -- Binance Chief Executive Officer Changpeng “CZ” Zhao said the cryptocurrency industry may move away from dollar-linked stablecoins and even revisit algorithmic equivalents in the wake of a US regulatory crackdown.
“The amount of pressure put on stablecoins is quite significant. Multiple agencies are applying pressure there,” Zhao, who heads the world’s largest crypto exchange, said during a Twitter Spaces Q&A on Tuesday. “That’s going to shrink the USD stablecoin market, so the industry is exploring its options.”
The New York State Department of Financial Services directed Paxos Trust Co. to stop issuing new tokens of the third-largest stablecoin, a Binance-branded coin known as BUSD that has roughly $16 billion in circulation. Paxos will end its relationship with Binance and cease issuance of BUSD as of Feb. 21, though it will continue to support the token for at least the next 12 months. Paxos also noted Monday that it was notified by the US Securities and Exchange Commission about a possible enforcement action.
Stablecoins like BUSD, Tether’s USDT and Circle’s USDC are crypto tokens that are intended to hold a set value, for example $1. They come in a variety of forms and some are underpinned by reserves like cash and bonds. Investors often park funds in stablecoins as they move between crypto trades, with around $136 billion currently in circulation.
“I think we’ll see more euro- or other, Japanese yen, Singapore dollar-based stablecoins,” Zhao added.
Currently stablecoins are dominated by dollar-backed tokens, with Tether accounting for more than 50% of the market. While euro-backed stablecoins exist, they have attracted little traction.
The regulatory crackdown around stablecoins likely was triggered in part by the collapse of the Terra Luna algorithmic stablecoin in May, Zhao said.
“Regulatory actions take pretty long cycles based on our experience,” he said, adding that one side-effect of the current wave of enforcement actions could be that algorithmic stablecoins make a comeback.
Algorithmic stablecoins use a complex combination of computer code and trader incentives to maintain their pegs of one-to-one to assets such as the dollar. In the case of Terra, the algo was unable to maintain the balance, resulting in billions of dollars in losses in the industry.
Zhao noted that BUSD wasn’t his or his team’s idea, instead something that originated from Paxos, and he emphasized that Binance was not a stablecoin issuer.
“BUSD was never very good business for us,” he said.
He also sought to play down the risks of holding stablecoins, noting that it’s only the minting of new tokens that Paxos stopped and that there shouldn’t be any losses to investors. In the last 24-hours around $540 million of BUSD was redeemed, data from CoinGecko showed.
“The fact that it’s an orderly wind-down is a good thing. People holding stablecoins shouldn’t lose any value,” he said.
©2023 Bloomberg L.P.
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