Paxos And BUSD Drama Highlights Centralized Risks In Stablecoins

Before now, the crypto industry views stablecoins as a secure and stable digital asset class. Stablecoins reduce investors’ exposure to price volatility and the categorization issues from regulators.

However, many people are rethinking their positions on stablecoins following the recent drama between some American regulators and Paxos, issues of Binance USD stablecoins.

Paxos And BUSD Drama

Paxos Trust Company is the sole issuer of Binance USD (BUSD) stablecoin. The stablecoin is a token for Binance, the largest global crypto exchange. Paxos oversees the issuing and redemption of BUSD based on its partnership with Binance.

However, some US regulators have focused on Paxos regarding its operations with BUSD. The New York Department of Financial Services (NYDFS) ordered Paxos to stop minting new BUSD tokens. Additionally, the Securities and Exchange Commission (SEC) sent notice to the blockchain firm disclosing its plans for a lawsuit as it alleges that BUSD is a security.

On its part, Paxos stated its readiness to comply with NYDFS’s order. It announced stopping the issuance of new BUSD tokens. But will still oversee the redemption of the stablecoin till February 2024. Regarding the notice from the SEC, Paxos maintained that BUSD is not a security under federal securities laws.

But the sudden regulatory slam on Paxos triggered massive redemption of BUSD coins. Paxos noted that it handled several redemptions worth over $2.8 billion between February 14 and February 17.

Centralized Risks in Stablecoins

Stablecoins are a form of crypto-asset class developed to provide price stability. The value could be pegged to a fiat currency or commodity or regulated by an algorithm through supply. It was introduced in 2014 with some exciting features that provide safety to investors’ funds. Many participants view stablecoins as a stable form of digital currency that is more suitable for usage as a medium of transaction and store of value than volatile assets such as BTC.

With time, stablecoins witnessed significant growth and adoption in the crypto space. However, the recent issues and events in the space have revealed some risks for investors of stablecoins.

Here are some centralized risks of stablecoins.

Centralized Issuer and Redeeming process

Some stablecoins have a centralized firm overseeing the minting and redeeming of the tokens. The company decides when to mint new tokens or allow users to redeem their funds from the token holdings.

The risk in this centralized system is that issuers could restrict the users from redeeming their stablecoin. They could also set a minimum redemption amount which could either be too high or too low for customers based on their token holdings. Also, issuers could make conditional redemption based on the performance of reserve accounts.

Token Freeze By Issuer

One of the key risks with centralized stablecoins is that the issuer maintains a higher control of the tokens. The issuer can freeze the coins at specific wallet addresses. In such a case, the user will lose custody of his assets due to the issuer’s influence on the stablecoins.

Regulatory Action on Issuer Impacts The Stablecoins

Regulatory moves against stablecoin issuers could impact the coins negatively. For instance, the regulatory target on Paxos, the issuer of Binance USD stablecoin, caused users to redeem their BUSD holdings massively.

Also, different regulatory rules and approaches under different jurisdictional laws could affect a stablecoin. For instance, a particular region could tag a stablecoin as a security, while another could classify it as a commodity. These categorizations could impact how the stablecoins will operate in such areas.

Lack of Transparency In Issuer’s Management

Centralized stablecoin issuers reserve all the power and influence on the stablecoin. They are not subject to conventional discussions and decisions regarding the management of the tokens and their reserves. Overall some issuers need more transparency in their operations and records.

The issuer holds the reserves for the stablecoins and could falsify the records regarding the token’s reserve accounts and details. Also, the issuer could stop minting the stablecoins at any point, distorting the tokens’ demand and supply. In most cases, they will only discuss with their partner after making their decisions.

Sometimes, an issuing firm may invest part of its token reserves in illiquid and risky assets. Such acts will leave it with little capital for handling potential losses.

DeFi Alternatives For Stablecoin Users

Due to the centralized risks in stablecoins, users could possibly suffer huge losses in cases of mismanagement. However, all hope is not lost in correcting the lapses in stablecoins within the DeFi ecosystem.

HAY destablecoin is a suitable DeFi alternative that redefines the essence of stablecoins through its unique functionalities. It is a new asset class that is fully decentralized.

HAY is powered by the Helio Protocol, an open-source liquidity protocol running on BNB Chain. Helio Protocol allows users to stake, borrow and earn yields on HAY.

HAY is over-collateralized by BNB and to a smaller extent by BUSD, redeemable with a $1 crypto value. Users can mint and borrow HAY using BNB or BUSD as collateral. The HAY tokens could be staked for yields or even transferred.

What Makes HAY Difference

HAY, as a destablecoin, stands out from other stablecoins. Here are two major distinguishing features.

• It is fully decentralized, using decentralized assets as collateral, unlike crypto-backed stablecoins, which will use centralized crypto assets. Also, HAY leverage liquid-staked assets, creating opportunities for users to earn rewards.
• The destablecoin strives for broader stability with no absolute peg to fiat currency. So, while it could experience fluctuations in price, it doesn’t exhibit high volatility like conventional crypto assets like Bitcoin.

Generally, destablecoins mirror the pattern of fiat currencies like USD while offering capital efficiency and decentralization, marking a new chapter in the wider stablecoin landscape. HAY is the first among the destablecoin asset class in the history of blockchain to offer a stablecoin product that solves the stablecoin trilemma.