Binance shakes up landscape for most-traded crypto tokens
THE competitive landscape for some of crypto’s most traded tokens is shifting, following a move by digital-asset exchange Binance to prioritise its own product and the attractiveness of rising interest rates in traditional finance.
Stablecoins – digital tokens which aim to keep a one-to-one value with a less volatile asset like the dollar – are typically used by traders as a haven from the wild price swings in crypto markets. They’re also a popular tool for trading across multiple venues or exchanges, and particularly on decentralised venues, can sometimes earn investors a tidy yield.
A long-established status quo between the market’s top three stablecoins by market value was shaken up by Binance last month, when the world’s largest exchange announced that it will automatically convert all deposits of Circle’s USDC stablecoin – the second largest of the group – into its own, the third-largest BUSD stablecoin.
The transition, which appeared to be in the making for several months before officially changing for users on Sept 29, has upended months of growth for USDC. Its value declined by more than 12 per cent since the start of September to below US$50 billion, according to CoinGecko data, while Binance’s BUSD has steadily ticked upward over the same period. Meanwhile growth in Tether’s USDT, the largest of all stablecoins at US$68 billion, has plateaued after losing around a fifth of its overall circulation in May, when it briefly de-pegged during the collapse of the Terra ecosystem.
“Tether is still in a very strong position in the market,” said Clara Medalie, head of research at blockchain data firm Kaiko. “Not every exchange lists BUSD and most traders will probably have accounts on multiple exchanges, so they’re going to favour a stablecoin that’s the easiest to work with.”
The announcement of Binance’s auto-conversion policy caused concerns of anti-competitiveness, as users may be less likely to convert their BUSD back into USDC when withdrawing from Binance if the stablecoins are considered of equal monetary value. Binance chief executive Changpeng Zhao said the change was about increasing liquidity on the platform, which in turn may make BUSD more useful to traders.
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But beyond forced conversions, Binance is readily seeking other ways to make BUSD more appealing to users. It temporarily removed trading fees between BUSD and Ether in August prior to a major upgrade for the Ethereum network, anticipating that investors would be buying up the latter to benefit from staking rewards. Data from Kaiko showed the share of the ETH-BUSD trading pair relative to Ether and USDT jumped 73 per cent immediately after zero-fee trading launched, though it lost most of those gains once fees resumed post-upgrade.
For USDC, trading volumes for its Bitcoin pair on centralised exchanges show another viewpoint of the token’s gradual decline. Medalie said the de-listing of USDC by Binance caused a global drop in volumes, demonstrating how even though it’s just one exchange out of hundreds, “Binance overall was very important to centralised market activity for USDC”.
But if the strategy were to shift USDC’s volumes directly over to BUSD, the plan may not be running as smoothly as hoped. Most of the lost trading volume for USDC has since shifted to Tether-denominated trading pairs, Medalie said, potentially due to far fewer exchanges offering BUSD.
Historically the most popular token on decentralised exchanges, USDC may also be receiving a rude awakening from turmoil in the broader global markets. Yields on decentralised finance protocols are lower thanks to a general drop in activity, making USDC less appealing when compared to rising interest rates on traditional products like three-month US Treasury bills.
“To earn interest on deposits in DeFi protocols, it’s not as profitable anymore,” Medalie added. “At the macro level, DeFi is no longer as attractive as it once was when you can earn a lot higher just by holding dollars.”
Not content with being limited to the realm of crypto trading, stablecoin issuers are also keen to show their tokens and blockchain technology can be useful in traditional finance as a means to faster and cheaper payments.
Trading app Robinhood listed USDC on its platform at the end of September, a move which primarily allowed users to store wealth earned from crypto bets without paying a premium on converting it back into fiat currency. The partnership was also a win for Circle’s payments ambitions, with USDC now the base trading pair for Robinhood’s crypto wallet project and to be used as a settlement asset across Robinhood products.
But as that vision inches closer to reality, central bankers and regulators have warned of the multiple risks that stablecoin payments might present to global financial stability.
Researchers at the Federal Reserve Bank of New York said the shift of flows from Tether into USDC after Terra’s collapse was especially concerning. In a paper on crypto stability last month, they said the fact that some stablecoins like USDC are viewed as more resilient in times of crisis “can amplify run risks” from those that more fragile, where issuers would still be forced to quickly sell off the real-world reserves that back them to meet customer redemptions.
Rich Teo, co-founder of Paxos which issues BUSD alongside Binance, said that after Terra, a lack of regulation for stablecoins was an additional factor in the recent shifting tides around the top trio. Paxos’s own USDP token is also among those being automatically converted by Binance.
Teo pointed to guidelines from some US regulatory agencies issued this summer, which he said “suggested that a private corporation should not be providing banking services such as yield, and also should not be issuing a stablecoin on an unregulated basis. That could have somewhat affected sentiment.” BLOOMBERG
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