Investors are fleeing BUSD

It was a bang when the US Securities and Exchange Commission launched a sweeping crackdown on Paxos. The BUSD issuer is issuing an “unregistered security,” according to the SEC’s assessment. The letter was not about the in-house stablecoin BUSD, but about a derivative, the Binance-Peg BUSD, which the crypto exchange issues under the same name on its own trading platform. According to their own statements, this is secured 1:1 with Paxos BUSD.

In practice, the Binance peg BUSD works as follows: If the crypto exchange wants to issue new stablecoins, Binance sends US dollars to Paxos and receives Paxos BUSD in return. Binance then uses the received stablecoins and deposits them as security (so-called collateral) for their own Binance-Peg BUSD.

Conversely, if an investor decides to exchange a Binance Peg BUSD for US dollars, a complex mechanism is set in motion. First, Binance sends the Paxos BUSD deposited as collateral for its in-house BUSD back to the stablecoin provider. This destroys the BUSD and transfers the same amount of US dollars back to Binance, which then goes from Binance to the investor.

The problem here: Unlike the Paxos BUSD, the Binance stablecoin is not regulated in the USA, which is why the SEC is now threatening legal consequences. In this respect, the lawsuit is primarily aimed at Paxos, but the US authority is also indirectly targeting Binance. In a first step, the SEC imposed an issuance ban on Paxos. As of today, February 21, the US company is no longer allowed to issue BUSD.

SEC ultimatum prompts panic reactions

Panic broke out among investors shortly after the SEC’s announcement. Blockchain tracking services like “Whale Alert” reported the “burning” of BUSD on an hourly basis, with drastic consequences for the market capitalization of the stablecoin. While the total value of all BUSD was just under $16 billion on Feb. 12, the day before the SEC announcement, a week later it was just over $13 billion.

Other large stablecoin projects also suffered losses. In the meantime, there was concern that the SEC could extend its lawsuit to USDC manufacturer Circle. Chief Strategy Officer Dante Disparte denied however, the rumors spread quickly on Twitter.

Investors flee to USDT

One provider in particular is benefiting from the current wave of panic: Tether. The market capitalization of the in-house stablecoin US-Tether has skyrocketed since then. BTC-ECHO market expert Stefan Lübeck explains that investors prefer to switch to USDT with the search for stablecoin alternatives outside the reach of the SEC. Binance investors in particular are likely to have favored this trend.

Due to the restriction of USDC to Binance, users only had Tether’s USDT as a way out, according to Lübeck. In September of last year, the crypto exchange ended support for Circle’s stablecoin. Since then, the trading platform has automatically converted USDC that are transferred to Binance into BUSD – probably not an option for many investors given the current situation.