- BUSD recently had an outflow of over $1.5 billion from Binance.
- Binance has been burdened with regulatory constraints from the U.S. government lately.
- Its activities have come under fire due to increased investigation on stablecoins.
The former has been embroiled in a legal battle with the U.S. regulator, Commodity Futures Trading Commission (CFTC), who sued for alleged fraud and violation of trading laws.
For the latter, its issuer, Paxos, was ordered not to supply it anymore and consequently lost its $1 peg.
All these and more have led to a high level of FUD (fear, uncertainty, and doubt) to encompass the coin as a safe or legitimate digital asset and investment.
What is wrong with Binance & BUSD?
Due to the heat from U.S. regulators, Binance has had its operations limited or outrightly prohibited in some places.
This led to many users panicking and removing their funds from the crypto exchange.
Multiple reports state that more than $1.5 billion has been pulled off, a number which keeps increasing with the ongoing controversies.
The CFTC sued Binance’s owner Changpeng ‘CZ’ Zhao, for $1B over allegations of trading breaches and possible fraud.
This led many investors to lose faith in Binance’s native token and remove their funds.
Now, unproven rumours have spread that CZ has been issued an Interpol ‘Red Notice,’ which signifies his arrest warrant.
In February, the New York Department of Financial Services (NYDFS) instructed Paxos Trust to halt the minting of the coin.
This was in response to the SEC‘s allegation that the stablecoin was unregistered security, contravening their laws.
As a result, Paxos wrapped up its partnership with Binance and stopped minting the stablecoin. After that, customers withdrew their BNB and BUSD.
Binance responded by converting the rest of its $ 1 billion Industry Recovery Initiative funds from its stablecoin to native crypto like BNB, ETH, BTC, etc.
Binance launched the initiative to “help projects which are otherwise strong but in a liquidity crisis” after the FTX exchange crashed.
This was, however, a temporary stop-gap to a more significant issue in play.
Possible Stablecoin problems
Typically, there are two variants of the Binance stablecoin.
One is the Binance-pegged BUSD, while the other is the Ethereum-based Paxos-backed BUSD.
However, reports suggest that their joint collateral value might need more transparency.
Earlier in the year, in January, a Binance spokesperson admitted to deficiencies and operational flaws with its stablecoin.
“The process of maintaining the peg involves many teams and has not always been flawless, which may have resulted in operational delays in the past,” he said.
This was in light of a barrage of criticism it faced over its finances, as the supply of Binance Smart Chain BUSD lacked about $1 billion worth of collateral.
Next, there was the issue of Binance reportedly shuffling customers’ funds with Binance-peg tokens (B-token) Reserves.
Binance admitted to having ‘mistakenly’ withheld collateral for more than 40 of its 94 Binance-peg tokens in one $16 billion wallet containing customer funds.
The image of Binance being sued by the CFTC, with its stablecoin losing its $1 peg and losing an enormous per cent of its value, does not make for good reading.
As a result, many investors converted the stablecoin to other assets, further reducing its price.
Binance is in a rut and the HODLers of their stablecoin – if any – can either watch or act.
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