The largest cryptocurrency exchange in the world, Binance, shook the industry late on Monday by publicizing that three stablecoins, including USD Coin, the second-largest stablecoin in the world, would no longer be maintained for exchange on its platform (USDC).

Binance Exchange

Major cryptocurrency exchange Binance was recognized in Hong Kong in 2017. It has a particular emphasis on trading altcoins. And over 600 cryptocurrencies and online tokens, which include Bitcoin (BTC), Ether (ETH), Litecoin (LTC), Dogecoin (DOGE), as well as Binance Coin, are available for trading on Binance (BNB).

The Binance exchange has some of the lowest operation fees of all cryptocurrency exchanges. It is mainly known for exchanging crypto-to-crypto or trying to trade between two cryptocurrency sets. Users who pay with the native BNB cryptos tokens receive discounts, and the product has high liquidity.

Bitcoin and finance are combined to form the name “Binance.” It claims to deliver high processing throughput, high expectations of safety and security, multi-tier and multi-clustered design, and the ability to process approximately 1.4 million orders per second. More than 600 different coins, including bitcoin, Ethereum, litecoin, and its native BNB tokens, are supported for trading.

What is USDC?

Digital currency USD Coin (USDC) is fully supported by U.S. dollars or assets denominated in dollars, such as U.S. Treasury securities. The reserve assets of USDC are kept with supervised U.S. financial institutions in segregated accounts. These separate accounts are managed by the accounting company Grant Thornton, which also delivers monthly attestation reports.

You might wonder how USDC keeps the peg to the U.S. dollar at 1:1. If you start a transaction to purchase a single USD Coin utilizing fiat money, that fiat money is placed and deposited as one U.S. dollar. A fresh batch of USDC is created as a result. When you exchange a USD Coin for fiat money, the USDC is destroyed when the fiat money is returned to your bank account.

As a fiat-collateralized stablecoin, USD Coin (USDC) tokens are backed by fiat currency, such as U.S. dollars. Stablecoins securitized by a cryptocurrency, an automated system, or a hybrid strategy are other varieties.

Stablecoins

Cryptocurrencies known as stablecoins have value anchored to another coin, sound, or financial instrument. The extreme volatility among the most widely used cryptocurrencies, such as Bitcoin (BTC), has made such investments less appropriate for widespread use in transactions. Stablecoins aims to offer an alternative to this situation.

Even though Bitcoin is still the most widely used cryptocurrency, its price or exchange rate is notoriously unstable. As an illustration, the cost of Bitcoin increased from an intraday low of just over $4,000 in March 2020 to almost $65,000 in April 2021 before falling by nearly 50% over the following two months. Intraday volatility can also be erratic; the value of the cryptocurrency frequently changes by more than 10% in a short period.

All this uncertainty can be excellent for traders, but for buyers and sellers, it makes simple transfers like purchases into risky speculations. Investors in cryptocurrencies who intend to hold them for long-term growth don’t want to make a name for themselves by using 10,000 Bitcoins to buy two pizzas. However, most businesses do not want to incur a loss if a cryptocurrency’s value declines after being paid.

A currency that is not legal tender has to be reasonably stable to function as an exchange medium by guaranteeing those who acknowledge it will maintain buying power soon. Even 1% daily changes in traditional fiat currencies are uncommon in forex trading.

Stablecoins, as their name suggests, promise to fix this issue by steadily preserving the cryptocurrency’s value in several ways.

Why doesn’t Binance support USDC?

On the surface, Binance’s decision to remove stablecoins it doesn’t control, like USDC & trueUSD (TUSD), and transform the balances to BUSD, appears to violate antitrust laws because a platform is substituting its support for that of a rival. But that is only a cursory examination.

That is not exactly how things are. Binance will still support other stablecoins. It will permit the putting in and taking out of USDC, TUSD, and other currencies (just not tether). The goal of the exchange is to create a large trading pool for USD stablecoins, powered by Binance’s USD stablecoin, similar to how FTX streams all stablecoins under a single umbrella category for USD and stablecoins.

However, why isn’t tether (USDT) listed among the stablecoin products that Binance will transform to BUSD?

Gaevoy believes it’s because Silvergate & Signature, two sizable crypto-friendly financial institutions in the U.S., won’t touch it because American regulators despise tether.

All of this resembles how FTX handles tethers. Since USDT is valued at 1:1 to the U.S. dollar, it is considered an asset rather than a stablecoin. Senior research personnel at CryptoQuant Burak Tamac have a different viewpoint. This action by the exchange is solely an attempt by Binance to siphon off USDC’s liquidity and destabilize USDT.

He stated that USDT and BUSD had been the top contenders for market velocity “according to our recent studies on stablecoin efficacy,” noting that USDC’s one-year acceleration is 0.08, especially compared to USDT’s 0.83 and BUSD’s 0.33.

He sustained, “Since USDC does not seem to be able to strive with BUSD, I think Binance aims to absorb USDC’s liquidity to long-term undermine USDT. The New York Dept. of Financial Services oversees BUSD’s issuer Paxos. BUSD will have a better chance of competing with USDT if regulations are more precise and have a higher Peg-Robustness score.

What’s behind it?

Binance has “reduced its assets drastically from the midpoint of August, whereas most exchanges generally range sideways,” Nansen strategist Martin Lee wrote in a statement.

According to data, Binance decreased its USDC holdings from 2.2 billion on August 14 to 1 billion on August 22. According to Lee, an exchange of 1.78 billion USDC from a Binance peg wallet to a Binance deposit wallet stands out as the most significant transaction. The Binance peg wallet includes tokens that are encased and pegged by Binance in a ratio of 1:1 to the corresponding native token, which, in his opinion, makes it significant.

Binance’s intent

What Binance intended when it eliminated USDC and other stablecoins as an able-to-trade pair is still the central mystery.

On the one hand, it might be a more extensive play to erase the stablecoin from its origins after it gets absorbed, given that the exchange is secretly removing USDC as one of its pegs. Because of their name, stablecoins maintain the dollar’s stability in addition to being used in trading pairs.

Binance may have more devious strategies for the stablecoin industry to further BUSD’s domination if it attempts to eliminate USDC’s role as one of the critical pegs for other tokens. On-chain data, however, doesn’t always provide a complete picture. This could all be a harmless reorganizing of assets.

For customers?

The decision by Binance to reduce the number of trading pairs also benefits its users. According to Paxos Trust Co., users’ security either issued both USDP and Binance’s recently popular BUSD.

Rich Teo, co-founder and CEO of Paxos Asia, told CoinDesk that BUSD is under the oversight of the New York State Department of Financial Services (NYDFS) and that its backing reserves are kept in a “bankruptcy remote trust which offers greater consumer protections,” saying “This is a positive development for the safety of Binance’s customers.”

Compared to USDT or BUSD on Binance, crypto buying and selling with USDC, TUSD, and USDP “have relatively little volume” based on the exchange. Kaiko’s Clara Medalie, the research director, made this observation in a tweet.

Buying and selling these stablecoins entails significantly higher spreads due to low trading volumes, resulting in additional user costs. Although contentious, Medalie believes that this action will enhance Binance’s price discovery and overall liquidity. The further concentration of market volatility on Binance and the expanding dominance of its products are drawbacks (for some).

Although most people seemed to approve of Binance’s decision, Circle criticized the exchange’s strategy of forcibly converting existing customer assets. Enhancing dollar cash flow on the biggest deal in the world might be advantageous, but the framework does raise potential concerns about market conduct.