Binance stablecoin circulating supply continues to decrease

The market capitalization of the Binance USD stablecoin (BUSD) has declined over the past two months. According to CoinGecko, the circulating supply fell to $15.4 billion on Wednesday, losing $1 billion in a week and $2 billion in a month.

In early December, BUSD’s market capitalization exceeded $22 billion. Immediately after the temporary halt in USDC withdrawals, BUSD experienced a sharp decline in circulation, dropping to $15.4 billion on January 25.

Related: Binance halts USDC withdrawals

BUSD Market Cap, December 13 – January 26, CoinGecko

However, after the wave of FUD in the media surrounding Binance, BUSD still has not recovered. The recent drop in circulating supply can be explained by the spread of news about the mismanagement of Binance’s token.

Related: Binance addresses all recent FUD in blog post

On January 10, Bloomberg published a report by blockchain research analyst Jonathan Reiter of ChainArgos claiming that the BUSD peg was not always fully backed by reserves. The data shows that the Binance token was under-backed between 2020 and 2021. Binance contacted Bloomberg and confirmed the problem:

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.

On January 24, Bloomberg reported another issue with Binance. According to the report, Binance mistakenly mixed customers’ funds with the collateral of Binance-peg tokens.

According to Bloomberg, the Binance exchange had issued 94 Binance-peg tokens (B-Tokens) and maintains reserves for nearly half of these tokens in a cold wallet referred to as Binance 8. The wallet reportedly contains more tokens than are necessary to back the number of B-Tokens issued. As the B-Tokens are intended to be backed on a 1:1 ratio, the presence of excess tokens in the wallet suggests that the collateral may be commingled with customers’ tokens.

Binance spokesman told Bloomberg:

Collateral assets have previously been moved into this wallet in error and referenced accordingly on the B-Token Proof of Collateral page. Binance is aware of this mistake and is in the process of transferring these assets to dedicated collateral wallets. Assets have been and continue to be backed 1:1.

This mismanagement caused another spike in FUD around the exchange. As Laurent Kssis, a crypto trading adviser at CEC Capital, said to CoinDesk:

In essence this means that there is no segregation of assets between clients’ funds and any collateral used. This could lead to the owner(s) not being able to withdraw due to lack of funds or liquidity by the exchange.

This could resonate like what FTX and Alameda did on a daily basis. An audit would generally highlight such shortcomings and ask to remedy it immediately. If Binance was regulated, this would be an essential part of their internal controls.

Related: Big accounting firms won’t audit Binance

In addition to these reasons for the decline in BUSD’s circulating supply, the retail sector also has a negative impact, as Binance’s banking partner, Signature Bank, announced that it will no longer process transfers under $100,000 through the SWIFT interbank messaging system, starting on February 1.

Recent problems have caused BUSD to fall behind its stablecoin competitors. According to data from DefiLlama, BUSD lost 11.3% of its market capitalization last month, while USDT gained 1.3% and USDC fell only 1.9%. Despite this, BUSD is the only one of the top three stablecoins to see an increase in market value over the past year.