A case study on the compliance and security of stablecoins

Stablecoins have emerged as major players in the crypto market this year, driven by user demand for flexible liquidity in fiat currencies. These currencies are defined as digital currencies that can be pegged to or backed by underlying real world assets. These assets can be anything from fiat money, commodities like gold or silver, or even some other cryptocurrency. As the name suggests, stablecoins are designed to have a stable (more) value like cash, in contrast to the volatility that prevails in cryptocurrency trading today.

To further illustrate this scenario, a typical fiat-backed stablecoin could involve the token issuer holding 100,000 tokens worth $ 1 each. Token holders can trade these coins like any other cryptocurrency. The main difference is that the owner can exchange coins for USD equivalent at any time. Since the USD is quite stable, users don’t have to worry about their coins depreciating overnight. As a result, there are now $ 120 billion worth of stablecoins in circulation, according to CoinMarketCap.

While stablecoins have risen as an opportunity to reduce volatility, various segments of the crypto industry have raised questions about their centralized nature. Since there is no way for issuers to prove backing funds, the 1: 1 exchange rate of major stablecoins to their backing assets, such as the US dollar and other fiat currencies, may not have many meanings, especially without proper regulation. Nevertheless, their potential shows in many everyday use cases.

To prove their use, Binance launched BUSD together with Paxos in 2019. A major driving force behind this release is to ensure that every unit of the stablecoin is backed by a verified US dollar and complies with regulatory and disclosure standards.

A question about reserves

For user peace of mind and to provide additional credibility with reserve issues, BUSD USD assets are held with FDIC insured banks. In a reserve report from Paxos, 96% of BUSD’s total market capitalization is covered by cash and other liquidity equivalent reserves, and US Treasuries are bringing back 4%.

To further secure these numbers, BUSD continues to be one of the few stablecoins to offer a monthly audited report on its reserves. This means that every BUSD holder can check at any time whether the supply of BUSD tokens matches the USD held and managed by Paxos.

More details on Busd here

The combination of audits and additional measures to review BUSD’s asset holdings is becoming increasingly important to address one of the top industry concerns.

Compliance with regulations

The second major concern for stablecoins today is the current regulatory loophole, which many investors believe offers little protection, especially when it comes to fraudulent activity. To address this issue, BUSD continues to adhere to the highest compliance standards of the New York State Department of Financial Services (NYDFS). A regulatory authority placed BUSD on the “Green List” by the regulatory authorities, whereby it was pre-approved for custody and trading using existing virtual currency licenses.

Paxos, the issuer of their stablecoin, which is also regulated by the same authority, guarantees:

• The value of each stablecoin token is directly linked to the US dollar and the amount of “reserved” funds is at least equal to the number of stablecoins in stock.
• Regulators oversee the establishment and maintenance of reserves that support stablecoins.
• The reserves are held as the safest assets (i.e. treasury bills, insured bank accounts).
• The reserves are completely segregated from the company’s assets and are remotely held for bankruptcy under the New York Banking Act.

This level of regulatory scrutiny helps maintain consumer confidence in an asset that operates in a largely unregulated industry.

Stablecoins in action

In the right situation, stablecoins offer some additional advantages over conventional cryptocurrencies. This typically includes mitigating the effects of market volatility, processing recurring transactions, and building a foundation for decentralized finance (DeFi).

Management of market volatility

It is known that the prices of cryptocurrencies fluctuate greatly due to public opinion or private business decisions. Traders can then choose to exchange their declining cryptocurrency for a fiat-backed asset or stablecoin to protect the value of their digital currency holdings. As a safe haven, investors can reduce risk by investing their holdings in a more stable investment vehicle.

Daily transactions

Like other fiat currencies, stablecoins can be used for everyday transactions like buying coffee or transferring money to a family member abroad. The fees can be lower than a transaction through the banking system, can be quicker and ensure that the recipient gets a fair value for the transaction.

Development of the DeFi platform

After all, stablecoins are essential for steady growth in the decentralized world by forming the foundation. BUSD is used on Binance Smart Chain (BSC) and Ethereum (ETH) for a number of different functions, one of the most important of which is borrowed. In loan settings, users can over-collateralise existing digital assets with stablecoins to ensure a consistent market price and prevent further volatility due to the underlying collateral.

The loans are just one example of how stablecoins can provide the stability necessary for blockchain to continue to flourish as an infrastructure and for cryptocurrencies to take on the role of traditional money as a vehicle.

Try to match

With stablecoin use cases on the rise, many believe that the financial industry will suffer if companies fail to address these concerns.

For these reasons, BUSD continues to work with a focus on compliance. This can protect the trust of users and regulators in stablecoins and open up more opportunities for both the public and private sectors. As more and more stakeholders show acceptance for trustworthy stablecoins, many believe that growth opportunities will follow closely.

During a recent virtual press conference, Binance CEO Changpeng “CZ” Zhao shared, “Our view is that regulators will step in … to make a profit of 10%, 20%, 80%. , 99% [crypto] Adoption. ”