If you have been following crypto commentators on Twitter since Sunday you have probably read that U.S. financial regulators' recent action against Paxos' centralized, dollar-pegged stablecoin BUSD is set to drive investors toward decentralized, censorship-resistant alternatives.
And while that seems logical, the evidence so far points to the opposite. Investors appear to be moving out of BUSD and its peers, USDC and DAI, and into tether (USDT), the world's largest centralized stablecoin, which has a market capitalization of $68.47 billion.
At press time, BUSD accounted for 81% of the total liquidity of $12.81 million in the busdv2 liquidity pool on the decentralized exchange Curve, while the pool's other components – DAI, USDC and USDT – accounted for the rest.
BUSD's dominance has increased from 69% since early Monday. In comparison, tether's presence has declined to 3%, the lowest in the pool, according to data sourced from analytics tool Chaineye and Curve, indicating an increased preference for USDT over BUSD and other centralized stablecoins in the wake of the regulatory action.
"Investors are fleeing BUSD, even though Paxos gave all assurance that its issuance program is fully backed and will be wound down orderly," Ilan Solot, co-head of digital assets at London-based Marex Solutions, told CoinDesk.
Early Sunday, the U.S. Securities and Exchange Commission (SEC) told Paxos it intends to sue the company for violating investor protection laws. Furthermore, the New York Department of Financial Services on Monday ordered Paxos to stop minting new tokens. In response, Paxos said it would cease issuing new tokens, and would process redemptions until at least 2024.
While the regulatory action has been BUSD-specific, market participants expressed concern that Circle's USDC could be next to face the heat, as evident from Twitter comments and from the imbalance in Curve's 3pool comprising USDT, USDC and DAI.
Tether's percentage share in the 3pool has dropped to 17.5% from 24% in two days, reaching a level last seen before Terra's collapse in May 2022. In contrast, USDC's share has increased to 41% from 38%. DAI's share has risen slightly to 40%, data from Dune Analytics show.
"Curve's 3pool, in theory, should be three equal parts of DAI-USDC-USDT. But the pool has become wildly unbalanced as investors dumped USDC and DAI for USDT," Solot said.
The move toward tether might be a surprise because the biggest centralized stablecoin is, perhaps, the most controversial, considering it is unregulated and the lingering lack of transparency about its reserves. On Friday, a New York judge rejected an attempt by iFinex, cryptocurrency exchange Bitfinex and stablecoin issuer Tether, to block CoinDesk's request for information about the financial reserves backing the USDT token.
The fact that tether successfully navigated the Terra-induced turmoil of May 2021 may have boosted investor confidence in the stablecoin. Either that or it's a case of dwindling alternatives.
"It's not exactly that trust increased, but the perception that the range of available alternatives is narrowing," Solot said. "For example, Binance will probably have to backtrack on it's goal to establish BUSDC as the main base for trading in the exchange. Now it's likely that USDT will remain the primary base."
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