Stablecoins have emerged as big players in the crypto market this year, driven by user demand for flexible liquidity in times of fiat money. These currencies are defined as a type of digital currency that can be pegged to or backed by underlying real-world assets. These assets can be anything from fiat currency, commodities like gold or silver, or even some other cryptocurrency. As the name suggests, stablecoins are designed to have a value that remains (rather) stable like silver, unlike the volatility common in cryptocurrency trading today.
To further illustrate this scenario, a typical fiat backed stablecoin might involve the token issuer holding 100,000 tokens, each worth $ 1. Token holders can trade these coins just like any other cryptocurrency. The main difference is that the holder can also exchange the coins for an equivalent amount in USD at any time. Since the USD is fairly stable, users don’t have to worry about their money losing value overnight. As a result, according to CoinMarketCap, there are currently $ 120 billion in stablecoins in circulation.
Although stablecoins have become an opportunity to reduce volatility, various segments of the crypto industry have raised questions about their centralized nature. Since there is no way for the issuer to prove the number of supporting funds, a 1: 1 peg of major stablecoins to their supporting assets, such as the US dollar and other fiat currencies, may not mean much, especially without proper regulation. That said, their potential is still evident in many everyday use cases.
To help prove their use, Binance launched BUSD with Paxos in 2019. A major driving force behind this release was to ensure that every unit of the stablecoin was backed by US dollars and compliant with regulatory and public standards.
A question of reservations
To give users peace of mind and give more credibility to questions about reserves, BUSD’s USD assets are held in FDIC insured banks. In a Paxos reserves report, 96% of BUSD’s total market cap is backed by cash reserves and other cash equivalents, and US Treasuries back 4%.
To further secure these numbers, BUSD continues to be one of the few stable coins to provide a monthly audited report of their reserves. Therefore, any BUSD holder can verify at any time that the supply of BUSD tokens is consistent with the USD held and managed by Paxos.
The combination of audits and additional measures to verify the ownership of BUSD assets is increasingly crucial to address one of the main concerns raised by the industry today.
The second main concern for stablecoins today is the current regulatory vacuum, which many argue offers little protection for investors, especially in fraudulent activity. To address this issue, BUSD continues to adhere to the strictest compliance standards of the New York State Department of Financial Services (NYDFS). Having a regulator has allowed BUSD to become âgreenlistedâ by regulators, making it pre-approved for custody and trading by existing virtual currency licenses.
Paxos, their stablecoin issuer, is also regulated by the same body, which guarantees:
- The value of each stablecoin token is directly linked to the US dollar, and the amount of âreserveâ funds is at least equal to the number of stablecoins in circulation.
- Regulators oversee the creation and maintenance of reserves backed by stablecoins.
- Reserves are held in the safest forms of assets (i.e. treasury bills, insured bank accounts).
- Reserves are fully segregated from company assets and are held safe from bankruptcy in accordance with New York banking law.
This level of regulatory oversight helps maintain consumer confidence in an asset that operates in a largely unregulated industry.
Stablecoins in action
Stablecoins offer several additional advantages to regular cryptocurrencies in the right situation. This often involves mitigating the effects of market instability, managing recurring transactions and laying the foundations for decentralized finance (DeFi).
Manage market instability
Cryptocurrency prices are known to fluctuate widely based on popular opinion or private business decisions. Traders can then decide to trade their falling cryptocurrency for an asset or fiat-backed stablecoin in order to protect the value of their digital currency holdings. As a safe haven, investors can reduce risk by leaving their holdings in a more stable investment vehicle.
Like other fiat currencies, stablecoins can be used for everyday transactions such as buying a coffee or transferring money to a family member abroad. Charges can be lower than a transaction through the banking system, occur more quickly, and ensure that the recipient gets fair value for the transaction.
Building DeFi Foundations
Finally, stablecoins are essential for continued growth in the world of decentralization by providing the foundation. BUSD is used on Binance Smart Chain (BSC) and Ethereum (ETH) for several different functions, one of the main ones being lending. As part of the loan, users can oversize an existing digital asset with stable coins to ensure a consistent market price, thus preventing any fluctuation caused by the underlying collateral.
Loans are just one example of how stablecoins can provide the stability needed for blockchain to continue to grow as an infrastructure, and for cryptocurrencies to play the role of traditional currency as a medium. ‘exchange.
In search of compliance
With the increase in use cases for stablecoins, many believe that the financial industry will be the area that suffers if companies fail to address these concerns.
For these reasons, BUSD continues to operate with an emphasis on compliance. This can preserve the confidence that users and regulators have in stablecoins and open up more opportunities for the public and private sectors. As more and more stakeholders accept the stablecoins of trust, many believe that opportunities for growth will follow closely behind.
In a recent virtual press conference, Binance CEO Changpeng âCZâ Zhao said, âOur opinion is that it’s great that regulators are stepping inâ¦ to reach 10%, 20%, 80%, 99 %. [crypto] adoption.”
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