BUSD Drama Sets Stage for Stablecoin Market Reshuffling

The uncertain future for embattled stablecoin Binance USD (BUSD) is stirring discord in the dollar-pegged crypto markets that one analyst says could accelerate into a dramatic reshuffling of the sector’s big winners and losers.

With regulators this week forcing the issuer of BUSD to cease minting new tranches of the coin, Binance, the world’s largest crypto exchange by trading volume, risks running headlong into the ramifications of its decision in September to give preference to BUSD as a trading pair.

That’s creating an opening for the two other big names in stablecoin markets: Circle’s USDC and Tether’s USDT. According to Kaiko researcher Conor Ryder, USDT will likely be the short-term winner as market makers ,and perhaps even Binance itself, tap that as the trader favorite over BUSD.

The potential shakeup comes as traders continue to move stablecoins off centralized exchanges. Outbound transfers of coins such as USDC and USDT on the Ethereum blockchain have outpaced deposits for nine consecutive days, according to data from Nansen. It is a ramping-up of the withdrawal trend that began in earnest with FTX’s collapse in early November.

“It’s very possible that after all the exchange fear from last year that holders of stablecoins have moved away from CEXs,” said Ryder, referring to centralized exchanges. He said another downward force has been market makers reducing stablecoin liquidity since the start of 2023.

The drawdown is even more acute when viewed through specific exchanges. In the last week, Coinbase’s stablecoin balances have dropped $411 million, or 53%, while Bitfinex’s balances fell $173 million, 57%.

No one has lost more than Binance, however. Its on-exchange stablecoin trove has shrunk by $1.5 billion in the past seven days. That this figure only represents an 8% decrease is a testament to how much larger Binance is than everyone else.

Some of these funds are landing on decentralized exchanges (DEX), said Dheraz Ahmed, managing director at STORM Partners. “This trend doesn't just stay with stablecoins," he said. "There has been an overall movement from CEXs to DEXs.”

Binance’s stablecoin troubles are more acute than everyone else's. After months of heartily promoting its BUSD stablecoin over competitors including USDC, the trading juggernaut is facing rising pressure from U.S. regulators, who this week ordered partner company Paxos to cease issuing the coin.

Over $2 billion worth of BUSD has been withdrawn from exchanges to be burned – i.e., permanently removed from circulation – in the past week, with Paxos alone destroying $700 million of BUSD held in its treasury.

One other area where the winds may soon shift is in USDC, Ryder said. While USDC was being used less and less on CEXs and more on DEXs lately, that could easily flip if Circle manages to avoid a similar fate to Paxos as the stablecoin market has been blown wide open.