Recently, the world-famous crypto currency exchange Binance confessed (1) that the BUSD peg on its platform was severely under collateralized by one billion dollars.
On Tuesday, Binance acknowledged that there were faults in its system that resulted in the platform losing its Binance Smart Chain BUSD peg and being at least one billion dollars at some time. According to a statement made by a spokeswoman for Binance:
"The process of maintaining the peg involves many teams, and it has not always been flawless, which may have resulted in operational delays in the past." Recently, the procedure has undergone significant changes, including stronger discrepancy checks, to guarantee that it will always be fixed at 1-1.”
Additionally, analysts disclosed that the largest exchange's stablecoin had more than once deviated from its peg by the enormous margin they had calculated. At least three times, they contend that there was a discrepancy between the amount of Binance-pegged BUSD flowing on its smart chain and the actual amount of BUSD expected to underpin it. According to the findings of these analysts, this number was greater than one billion dollars each time the issue occurred.
The spokesman for Binance emphasized that the problem, which has since been resolved, did not affect the redemptions made by users. Nevertheless, the representative did not provide specifics regarding the duration of the Binance-peg BUSD under collateralization. In addition, the Binance spokesperson did not mention when the crypto currency exchange first became aware of the problem or when it began working to resolve it.
Despite this, Binance responded to the "timing mismatch" by writing a blog post in which they explained:
According to the data, it is abundantly evident that the realignment did often not maintain rate with the demand for Binance-Peg BUSD. Since we discovered this issue ourselves in the previous year, we now perform rebalancing on a more regular basis in order to guarantee that the Binance-Peg BUSD is publicly fully backed.
Paxos, a financial technology company, is largely responsible because US dollars fully collateralize the BUSD token based on the Ethereum blockchain. On the other hand, BUSD on the Binance Smart Chain is not subject to the same kind of external regulation. The top exchange claims it will use the Paxos-regulated BUSD as an enabler to legalize its BUSD. The Binance Smart Chain-bound currency unit BUSD has been given the name Binance-Peg BUSD.
Stablecoins Facing Tough Challenges
The robustness of stablecoins and the question of whether or not a trustworthy money source backs them is a heated issue in the crypto currency field. This is because stablecoins are designed to mirror the value of something very closely, most commonly the value of the US dollar.
For instance, if a person invests $10 billion in a stablecoin, there must be a $10 billion cache available somewhere to support this stake. In the actual world, however, stablecoins cannot provide sufficient backing, and some of them have even failed completely. One example is Terraform Labs and the TerraUSD token that it issued.
Because of the widespread perception that stablecoins are unreliable, authorities and the media are increasingly concentrating on these digital currencies. Even the most well-known stablecoin, Tether's USDT, has been the target of criticism over the past several years due to the widespread belief that it does not have sufficient backing.
Due to the discovery made by the New York state over false backing claims in 2021, Tether had to make restitution (2) for $18.5 million. Letitia James, the AG of New York, stated at the time that she was pointing the finger of blame at Bitfinex as well:
"Tether's claims that its virtual currency was fully backed by US dollars at all times were a lie," and "Tether's virtual currency was not fully backed by US dollars." [Bitfinex and Tether] masked the real dangers that investors were exposed to and were run by unlicensed and unregulated persons and businesses that dealt in the shadowy parts of the financial system.
In the meantime, the ongoing crypto contagion that began in 2022 also affects stablecoins.
