Stablecoin Issuers May Be Crypto Industrys Achilles Heel

When New York regulators ordered cryptocurrency exchange Paxos to halt stablecoin production this week, one of the Ethereums was needed. Ethereum The biggest weakness in the ecosystem: Issuers of fiat-backed stablecoins that must comply with the laws of their respective jurisdictions.

The combined market capitalization of the three major stablecoins (USDT USDT , USDC USDC , BUSD BUSD respectively) according to CoinMarketCap.com, it is currently equivalent to 46% ~ $180 million of Ethereum's total market capitalization. All three stablecoins are backed by fiat, meaning stablecoins are backed 1:1 by cash, short-term US Treasuries and USDT, other countries' treasuries, precious metals, loans and investments. In contrast, Uniswap, the most prominent DeFi project in the Ethereum ecosystem, has a market cap of $5 billion.

The main goal of many cryptocurrency companies is to decentralize money, reducing dependence on institutional power and increasing access to self-service options and peer-to-peer transactions. As a result, they often have trouble accessing the traditional banking system. Stablecoins solve this problem by allowing cryptocurrency users and exchanges to rely less on slow wire transfers that represent dollars online. But the reliance of mainstream stablecoins on centralized financial institutions runs the risk of going mad, which is becoming increasingly clear as regulators themselves issue stablecoins.

That's what happened this week thanks to Paxos Trust Co's partnership with Binus, the BUSD cryptocurrency exchange. The New York Department of Financial Services (NYDFS) has asked Paxos to stop issuing this stablecoin as of February 21st. The Securities and Exchange Commission (SEC) also issued a stern warning to Paxos this week, arguing that it is a BUSD stock and could be subject to further enforcement action. Binance CEO Changpeng Zhao tweeted on Monday: "BUSD is a stablecoin fully owned and managed by Paxos. As a result, BUSD's market cap will shrink over time. Paxos will continue to serve the product and make redemptions."

According to Nansen Data Analytics, about 90% of BUSD is still on Binance, the world's largest cryptocurrency exchange. The exchange has played a key role in expanding the adoption of cryptocurrencies in emerging markets by providing an easy interface to convert local currency into BUSD and other cryptocurrencies. According to a 2022 MasterCard survey, one-third of Latin American respondents said they use stablecoins for everyday purchases. Stablecoins like BUSD have opened up new opportunities for people isolated from the global economy. Will existing BUSD users switch to other fiat-backed stablecoins, experiment with cryptocurrency-backed alternatives, or stop trusting stablecoins altogether?

Regulating market-backed stablecoins will temporarily make it difficult for individuals and businesses around the world to enter the cryptocurrency ecosystem. But that won't stop innovation and experimentation with cryptocurrency-backed stablecoin alternatives like DAI. DAY . Nor will regulation of stablecoins stop the growing adoption of cryptocurrencies like bitcoin. The MakerDAO Foundation behind DAI can expect regulators to scrutinize not only crypto exchanges, but also non-profit organizations and other stablecoin issuers. The MakerDAO community recently launched a $5 million legal defense fund.

For now, the US dollar and the banking system remain king and queen of the internet economy. However, unless regulators are clear and cooperative with the cryptocurrency industry, US regulators may soon lose out in international markets. If so, America's banks could be crushed by the wheels of history.

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