Fresh off his Senate confirmation, the Fed’s new Vice Chair for Supervision, Michael Barr, targeted the crypto industry in a speech on Wednesday. Barr commented that “in a rapidly rising and volatile market, participants may come to believe that they understand new products only to learn that they don't, and then suffer significant losses." To prevent these losses, and to promote “fairness,” the Vice Chair pledged to use “regulation, supervision and enforcement” to protect citizens “from unfair treatment.” Speaking about stablecoins, Barr warned that they “could pose financial stability risks.” Thus, Barr implored Congress to “work expeditiously to pass much-needed legislation to bring stablecoins... inside the prudential regulatory perimeter.”
Barr’s comments came 24 hours after Binance made its own headlines regarding stablecoins. The world’s largest cryptocurrency exchange announced that it will no longer allow trading or staking of Circle’s USDC, Pax’s USDP or True USD (TUSD). Instead, Binance users will see their accounts auto-converted 1:1 to BUSD, Binance’s own dollar-pegged stablecoin. The move away from other stables will be completed by September 29th. Additionally, there are no plans to convert Binance users’ accounts away from Tether’s USDT.
Since mid-Aug, looks like they’ve converted $1.5B worth of USDC to BUSD.— Alex Svanevik 🐧 (@ASvanevik) September 6, 2022
$17B -> $18.5B BUSD. pic.twitter.com/vKV7O9qI9Z
Binance’s sudden move led to accusations that the exchange was manipulating its own users’ funds to increase BUSD market share. In a message to Fortune, an unnamed Circle representative stated that the move “does raise potential market conduct questions.” Is it legal or ethical for Binance to swap its users coins automatically? Regardless of the question, Alex Svanevik of the analytics firm Nansen provided data suggesting Binance has already started swapping out USDC.
Not delist. You can still deposit and withdraw USDC. Just merging all liquidity into one pair. Best price, lowest slippage for users.— CZ 🔶 Binance (@cz_binance) September 5, 2022
Many in the crypto-space were outraged by the ‘delisting’ of USDC. The second largest stablecoin by market cap (just shy of $52 billion), USDC is seen as a paragon of regulatory best practices for stablecoins. Binance founder CZ took to Twitter to dispute the delist claims. He pointed out that users “can still deposit and withdraw USDC.” However, by “merging all liquidity into one pair… Best price, lowest slippage for users.” Circle CEO, Jeremy Allaire, agreed that “converged dollar books on Binance… is a good thing.” He was surprisingly positive about the news claiming that “USDC utility just increased.”
The big unspoken link between Fed action on stablecoins and Binance’s merging of liquidity to BUSD may be Tether. The world’s largest stablecoin was noticeably untouched by Binance’s otherwise sweeping stablecoin changes. Many have doubts that every cent of the $67 billion dollars of USDT is backed by dollar reserves. In early 2021, Tether and Bitfinex settled a suit with the state of New York. The two companies, who share the same ownership, had commingled assets in order to obscure losses from clients and regulators. It is known that U.S. regulators dislike Tether. Now that the Fed has announced its intentions regarding stablecoins, it behooves Binance to limit its business with Tether.
Ironically, Binance’s forced merge of small stablecoins may help them compete against the giant that is Tether. Currently, trading anything other than a Tether-based asset pair on Binance can be difficult due to low liquidity. In other words, people may begrudgingly use Tether, despite its dubious regulatory record, because there are many more buyers and sellers in Tether-based markets. Or as CZ said, big pools have “best price, lowest slippage.” Now that USDC, USDP, TUSD and BUSD have turned into one giant pool, Tether will face unprecedented competition on the world’s largest cryptocurrency exchange. Instead of a fragmented set of small markets fighting against Tether, there will be one giant BUSD pool as an option against USDT trades. This will encourage traders to ditch Tether. Additionally, Binance users can freely withdraw from Binance using the other stablecoins if they don’t want to hold BUSD. On the other hand, users that hold USDT will need to pay a fee if they want to exchange their USDT and enter the BUSD markets. This means that Tether is getting siloed on Binance.
Don't judge this move by appearances. Binance’s drastic action may be less of a power grab for themselves and more of a silent war against Tether. Given Vice Chair Barr’s strong words on Wednesday, plus Monday’s revelation that Binance and CZ were under U.S. Federal investigation in 2020, it’s possible that Binance wants to play nice with regulators. Whether that is true or not, CZ is well aware that Tether presents a great regulatory risk to their business, and the business of blockchain in general. This week’s news will surely shake up the stablecoin status quo in the future.