U.S. regulators again amped up the enforcement actions, with a NY state regulator and the SEC both taking aim at Binance's Paxos-issued stablecoin BUSD. This week we examine the initial impacts on the market as the third largest stablecoin is phased out.
The crypto industry was again shaken this week when news came out that the NY Department of Financial Services (NYDFS) had ordered Paxos to stop issuing BUSD, with an NYDFS spokesperson saying Paxos “violated its obligation to conduct tailored, periodic risk assessments and due diligence refreshes of Binance and Paxos-issued BUSD customers to prevent bad actors from using the platform.” Additionally, it was revealed that the Securities and Exchange Commission (SEC) sent a Wells notice to Paxos, informing the company that the SEC is considering legal action against Paxos, alleging that BUSD is a security. (I’ve offered my thoughts on the regulatory aspect of this here.)
We’ve covered BUSD’s growth and market share extensively in previous Data Debriefs, noting that about 35% of Binance volume is denominated in BUSD and it quickly grew to the third largest stablecoin by market cap. Just a month ago I speculated that Binance could be laying the groundwork to phase out USDT.
Now, BUSD must be phased out by February 2024, so let’s take a look at the reaction in centralized markets as well as DeFi, including the second order effects on USDT and USDC.
BUSD-USDT Pair
Over 99% of BUSD-USDT volume takes place on Binance and it is one of Binance’s highest volume pairs.
Interestingly, the day of the news was not the highest volume day in the pair’s history, nor the second or third. February 13 was the fourth largest day by volume, following May 11 and 12 (Terra) and November 9 and 10 (FTX) of last year, and only slightly larger than May 20, 2021 (major sell off).
I found this relatively muted reaction surprising given the severity of the action and Binance CEO Changpeng Zhao’s ("CZ") statement that “BUSD market cap will only decrease over time.” This underwhelming reaction is further reflected in the BUSD-USDT price.
That small notch at the end of the chart pales in comparison to previous price shocks – again post-Terra and post-FTX – where BUSD surged against USDT because of perceived danger to USDT. BUSD’s price against USDT did not hit the recent low of ₮0.9965 on December 4, 2021, instead bouncing off a low of ₮0.9977. As I write this, it has almost returned to parity with USDT.
For the next year, as long as Paxos is offering 1:1 redemptions, BUSD should trade at parity due to arbitrage. Zooming in on the last few days, it’s apparent that panic subsided as the discount improved and arbitrageurs stepped in to purchase at a discount.
As BUSD’s price dropped relative to USDT, so too did the liquidity on this pair. Bids within 0.1% of the mid price dropped from over $100mn on February 9 to a low of under $7mn on February 13. Asks dropped much more rapidly, falling from $117mn to $19mn in just four hours.
However, liquidity for this pair has since surged, with bids hitting $50mn and asks $150mn, indicating both that there is both strong sell pressure and an appetite to purchase discounted BUSD.
Other Pairs
Liquidity has begun to flow out of BUSD pairs on Binance, though perhaps not as quickly as one would expect. Within 1% of the mid price, BTC-BUSD’s liquidity has halved from around $20mn to $10mn while the USDT pair has also lost $10mn, though this represents just a 25% drop.
However, this has not been too detrimental to the pair’s spread, which is just about even with its level from the past month. I have included Coinbase’s main pair for context and it is a significant development that its spread is now better than the Binance BTC-BUSD pair’s (note that Binance does not have trading fees for these BTC pairs), which could be a sign that liquidity on U.S.-regulated exchanges is improving relative to international competitors as regulators are stepping up enforcement.
Shown another way, it’s clear that this has been beneficial to Coinbase while (obviously) harmful to Binance. Since February 1, Binance’s BTC liquidity has fallen almost 30% while Coinbase’s is up nearly 15%.
The outflow of liquidity is also apparent in altcoins; their liquidity fell from $9mn to just over $5mn, since recovering to $7mn. Notably, liquidity also deteriorated and then bounced back to previous levels for USDT pairs, perhaps suggesting that market makers were skittish about any stresses to the exchange but the fear has since subsided.
Binance ranks particularly high, in part because they eliminated trading fees for BTC pairs, in addition to having dominant volumes which makes it hard for market depth to keep pace. While there is of course still a risk that wash trading occurs on Binance, particularly for their zero fee pairs, the focus of this analysis is on smaller exchanges where volumes are more drastically suspicious and warrant further investigation. Bitforex leads the average volume/depth ratio across the highest volume pairs of 2023 and so we have used them as the focus of our analysis throughout this article.
DeFi
BUSD-USDC/USDT/DAI Liquidity
The largest Curve pool containing BUSD – BUSDv2, pooled with USDT, DAI, and USDC – has lost $8mn of liquidity in the last month. The pool has also become heavily imbalanced, moving from 36% BUSD on January 18 to 81% BUSD on February 15. As discussed in our previous Deep Dive on Curve pools, BUSD’s increasing proportion of the pool indicates that its demand has decreased as users swap BUSD for one of the other stablecoins.
Meanwhile, the largest Uniswap V3 BUSD pool – BUSD-USDC with a 0.01% fee – has actually had a net inflow of $3.87mn of liquidity since the news. I suspect that this is because of Uniswap V3’s higher volumes (discussed below) and concentrated liquidity; essentially if BUSD were to depeg, liquidity providers would not be stuck with exposure to a devalued stablecoin.
There were seemingly no instances of just-in-time (JIT) liquidity in this pool – the crosshairs above indicate mints and burns done in quick succession, though none in the same block, a requirement for JIT liquidity.
BUSD-USDC/USDT/DAI Volumes
While Curve has long been considered the hub of stablecoin swaps, Uniswap V3 actually facilitated five times as much volume between BUSD and USDC/USDT/DAI on the day of the news. Quietly, Uniswap V3 has captured a huge market share of non-3pool stablecoin to stablecoin swaps, largely owing to concentrated liquidity. In fact, when testing using the DeFiLlama DEX Meta-Aggregator, I found that nearly every aggregator would direct trades of any size involving these four stablecoins through Uniswap V3.
Buys and sells of BUSD on Uniswap V3 were nearly perfectly balanced in the wake of the regulatory action while Curve had $9mn worth of BUSD sells for USDC/USDT/DAI on February 13 compared to $6mn worth of USDC/USDT/DAI sells for BUSD, again contributing to the pool’s imbalance.
3pool
Perhaps the most interesting effects of the regulatory actions weren’t related to BUSD but instead USDC and USDT. Below are all USDC-USDT swaps on Curve, as well as USDC’s price relative to USDT. In the four hours after the announcement, swaps into USDT outpaced the reverse $141mn to $93mn, leading to USDC hitting a low of ₮0.9939. However, in the next six hours this trend flipped, with swaps into USDC leading $147mn to $111mn, helping to bring USDC closer to ₮1.
This imbalance is further evident in the composition of the 3pool. Prior to the news, there was $139mn of USDT in the 3pool. This rapidly decreased in the hours after the news, first from swaps of USDC into USDT, then DAI into USDT as users scrambled to move into a stablecoin with less perceived regulatory risk.
This imbalance was almost entirely driven by swaps, as the TVL of the pool did not drop much; from $537mn before to $523mn as of this writing.
Conclusion
Does anyone else feel that the reaction to this news is… underwhelming? The third largest stablecoin was given an expiration date of February 2024 and the market has seemingly shrugged it off. This is a testament to BUSD’s relatively niche use case: trading on Binance. While it is used in DeFi, it is not systemically important to the ecosystem and thus far has proven relatively easy to unwind. Some credit should also be given to CZ and Paxos, who both did a relatively good job of communicating what was happening and tamping down any panic.
As I wrote a month ago, the interactions between BUSD, USDT, and USDC are chaotic and lack reliable patterns. This week was perhaps the best example yet. Just three months ago – as the FTX saga was unfolding – BUSD hit a 3% premium to USDT. Post-Terra, USDT made up almost 85% of the 3pool as holders rushed for the exits. Now, as the result of regulatory action, USDT is being treated as the safe haven stablecoin, though it seems some of the fears surrounding USDC and DAI are already subsiding.
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