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Binance Blog

The Importance of Fiat Reserve-Backed Stablecoins

2022-07-21

How independently attested fiat reserves and licensing have helped BUSD maintain its peg during recent stablecoin volatility

  • BUSD remains one of the most trusted stablecoins on the market because it’s regulated and backed by reserves subject to regular attestations

  • Alternatives, including algorithmic stablecoins, have recently suffered from a lack of safeguards

  • BUSD continues to maintain its peg through sound reserves, regular Withum attestations, and NYDFS green list status 

Where exactly does confidence in a stablecoin come from? By far, the most important component of BUSD’s trustworthy reputation is its regulatory oversight and compliance. By adhering to strict guidelines and remaining transparent with the user community, BUSD continues to meet user expectations through the recent climate of de-pegging events.

Unlike algorithmic stablecoins, BUSD offers a transparent product that verifies, protects, and ensures the reserves, effectively maintaining its US dollar peg. That’s not true of all stablecoins available on the market.

Since Tether’s founding in 2014, stablecoins have been hugely important for crypto markets. The benefits of a stable asset in volatile markets are easy to see, making them hugely popular. However, all these points rely on one key factor: maintaining a stable peg.

How you peg a coin to the US dollar, euro, or other crypto assets varies widely. Over time, we’ve seen some methods prove more popular than others. A few have shown higher degrees of success. As we look towards the future, with recent de-pegging events in mind, one thing seems evident: the importance of regulation in this space will continue to grow in maintaining stablecoin stability.

What does a stablecoin like BUSD need to be successful?

To provide investors with peace of mind, a successful stablecoin should cover at least three key areas: regulation, audits, and sound reserves.

1. Reserves that provide secure forms of collateral

Maintaining a peg relies on market forces to keep a price stable, even through volatile times. A fiat-backed stablecoin should always be backed by secure assets that are unlikely to lose their value. 

Of all possible reserve assets, pegged fiat currency is a good option. It’s for this reason that BUSD has maintained 96% of its reserves in Cash and Cash Equivalents with the other 4% of reserves being held in US Treasury Bills. This provides an industry-leading anchor for the USD peg, especially when paired with one of the world’s most trusted interest-bearing securities in US Treasury Bills.

Along with making sure the token is fully collateralized, Paxos provides a transparent process for the minting and burning of BUSD tokens. Paxos also has the right to freeze accounts and remove funds if needed due to illegal activity. These principles all adhere to the requirements of Paxos' Trust Charter and New York banking laws applicable to the stablecoin. 

2. A transparent auditing process of available reserves

Binance believes that a fiat-pegged stablecoin can only be as good as the reserves that back it up. This collateral must be regularly attested by a trusted auditor. This way, users know that they will be able to access the collateral that backs BUSD. 

Typically these attestations are released monthly, as is the case with BUSD and its reports from Withum. 

3. Working with regulators to gain and maintain a license and be regulated

There are no two ways about it. A regulated stablecoin is a more trustworthy stablecoin. Investors have the protection of a regulatory body that has assessed the asset offered.  The future of stablecoin will no doubt rely on cooperation with regulatory bodies in this space.

BUSD is issued by Paxos, a partner of Binance, which is regulated by the New York State Department of Financial Services (NYDFS). The issuer and the stablecoin itself is overseen and regulated by NYDFS, a leading regulator in this area. This gives BUSD membership to a rare group of stablecoins that can also claim regulatory compliance that provides protection and security for users.

In addition, BUSD is also green-listed by NYDFS, making it pre-approved for custody and trading by any of the NYDFS’ virtual currency licensees, unlike many of its large competitors.

Why is the combination of regulation, audits, and reserves so important?

In short, regulatory oversight, regular attestations, and robust reserves all work together to stop de-pegging events from occurring. It becomes incredibly difficult for the factors to emerge that allow a stablecoin like BUSD to de-peg. 

More often than not, a stablecoin with less rigorous oversight and reserving practices will de-peg. This is because it does not have the reserves it claims to, holds risky collateral, or is mismanaged. Our three keystones provide good security against these factors to ultimately protect the most important people in the ecosystem: our users.

Don’t take chances with your stablecoin investments

Stablecoins, including BUSD, are an essential part of the crypto ecosystem, and we need investors to hold them with confidence. That’s why you should ensure that any stablecoin you own meets our three key criteria. 

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