While some market participants were initially shocked that the world’s largest crypto exchange by volume ended its support of a slew of stablecoins, others are praising the move – including the issuer of the largest stablecoin that’s getting ousted.
The decision touches a core part of the crypto ecosystem. Traders use stablecoins – cryptocurrencies whose prices are anchored to an asset such as the U.S. dollar – as a bridge between traditional government-issued (fiat) currencies and blockchain-traded digital assets. The combined market capitalization of stablecoins mushroomed to $160 billion from less than $20 billion two years ago.
In the last 24 hours, four-fifths of all bitcoin (BTC) and three-fifths of all ether (ETH) traded on exchanges were done against U.S. dollar-denominated stablecoins, according to data compiled by CryptoCompare.
With some $20 billion in average daily volume over the past month, the Binance exchange is roughly eight times larger than its nearest competitor, FTX, in terms of transactions, according to Coinranking. Thus, its announcement stirred some controversy at first, interpreted as the exchange’s attempt to use its heft to prop up its own $19 billion stablecoin and simultaneously favoring Tether’s USDT, the largest stablecoin, worth $67 billion, over its challenger, the $52 billion USDC.
While it seems counterintuitive, Jeremy Allaire, chief executive officer of Circle, the firm that issues USD coin, tweeted that the “change will likely lead to more USDC flowing to Binance.”
As crypto traders don’t really use BUSD outside of Binance itself, “this will likely benefit USDC usage as the preferred cross CEX [centralized exchange] and DEX [decentralized exchange] stablecoin rail,” Allaire added. “With consolidated dollar books, it will now be easier and more attractive to move USDC to and from Binance for trading core markets.”
A Binance spokesperson said the firm’s goal with reducing the number of tokens trading at the exchange was to concentrate stablecoin liquidity. The decision was agreed upon with Circle and other third parties in advance.
The co-founder of Wintermute, a major crypto trading firm, agreed that USDC will benefit. “This is positive for USDC (and TUSD and others),” Evgeny Gaevoy tweeted. “It’s not USDC ‘delisting’, it’s another big step towards tether (USDT) losing ground to U.S.-native stablecoins.”
For the users’ own good?
Binance’s move to slash trading pairs carries advantages for its customers, too.
Paxos Trust Co., which issues both USDP and Binance’s newly favored BUSD, claimed there were security improvements for users.
“This is a positive development for the safety of Binance’s customers,” Rich Teo, co-founder and CEO of Paxos Asia, told CoinDesk, citing that BUSD is under the supervision of the New York State Department of Financial Services (NYDFS) and its backing reserves are kept in a “bankruptcy remote trust which offers greater consumer protections.”
Crypto trading with USDC, TUSD and USDP “have relatively little volume” compared with both USDT or BUSD on Binance, Clara Medalie, research director at crypto market research firm Kaiko, pointed out in a tweet.
Low trading volumes mean that trading with these stablecoins carries significantly higher spreads, essentially incurring hidden costs for users.
“While controversial, this move will likely improve price discovery and overall liquidity on Binance,” Medalie said. “Downsides (for some) are further centralization of market activity on Binance and growing dominance of Binance-issued products.”
Even though the verdict on Binance’s move seemed mostly positive, Circle criticized the exchange’s approach to unilaterally convert existing customer assets.
“While optimizing dollar liquidity on the world’s largest exchange may carry benefits, the paradigm does raise potential market conduct questions,” a Circle spokesperson told CoinDesk.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.