Tolu is a cryptocurrency and blockchain enthusiast based in Lagos. He likes to demystify crypto stories to the bare basics so that anyone anywhere can understand without too much background knowledge. When he's not neck-deep in crypto stories, Tolu enjoys music, loves to sing and is an avid movie lover.
Globally-renowned exchange Binance recently admitted that its BUSD peg was inadequately undercollateralized by $1 billion.
On Tuesday, Binance admitted to flaws in its system that cost the platform its Binance Smart Chain BUSD peg and left it at least $1 billion undercollateralized at some point. According to a Binance spokesperson:
“The process of maintaining the peg involves many teams and has not always been flawless, which may have resulted in operational delays in the past. Recently, the process has been much improved with enhanced discrepancy checks to ensure it’s always 1-1 pegged.”
Furthermore, analysts revealed that the leading exchange’s stablecoin slipped its peg by that massive margin more than once. On at least three occasions, they allege a difference between the Binance-peg BUSD amount circulating on its smart chain and the real BUSD quantity meant to back it. According to these analysts, this figure eclipsed $1 billion each time the glitch occurred.
The Binance spokesperson pointed out that the issue, which has been corrected, never impacted user redemptions. However, the spokesperson did not detail how long the Binance-peg BUSD undercollateralization lasted. In addition, the Binance mouthpiece also did not state when the crypto exchange discovered the issue and fixed it.
Nonetheless, Binance addressed the “timing mismatch” in a blog post, explaining:
“From the data, it is clear that the rebalancing did not always keep pace with the demand for Binance-Peg BUSD. Having identified this ourselves last year, we now rebalance more frequently to ensure that Binance-Peg BUSD is transparently fully backed.”
Binance BUSD Peg
The Ethereum blockchain’s version of BUSD enjoys full collateralization by US dollars, largely thanks to fintech firm Paxos. However, BUSD on the Binance Smart Chain does not have the same external regulation. To legitimize its BUSD, the leading exchange claims to use the Paxos-regulated BUSD as an enabler. This Binance Smart Chain-bound BUSD is thus called Binance-Peg BUSD.
Stablecoin resiliency and whether they have the backing of a reliable money source is a contentious topic in the crypto space. The reason is that stablecoins supposedly closely track the value of something, often the US dollar. For example, if an investor puts $10 billion into a stablecoin, a $10 cache should be available somewhere to back this stake. In real life, however, stablecoins have failed to provide adequate backing, and some have even crashed, such as Terraform Labs and its TerraUSD token.
This perceived stablecoin unreliability sees regulators and media outlets increasingly focusing on stablecoins. Even the most prominent stablecoin, Tether’s USDT, has come under fire for years over concerns that it lacks full backing. In 2021, Tether had to pay $18.5 million in penalties following a New York state discovery regarding false backing claims. Also fingering, Bitfinex as a culprit, New York Attorney General Letitia James said at the time:
“Tether’s claims that its virtual currency was fully backed by US dollars at all times was a lie. [Bitfinex and Tether] obscured the true risk investors faced and were operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system.”
Meanwhile, the sustained crypto contagion since 2022 is also impacting stablecoins.