Depegging, bank runs and other risks loom – Cointelegraph Magazine

Stablecoins are entering a period of great uncertainty following the U.S. Securities and Exchange Commission labeling BUSD an “unregistered security” and ordering Paxos to stop minting new tokens.

Do these moves signal a wider war by U.S. regulators on stablecoins? Could the SEC declare all stablecoins securities, or is BUSD a special case?

Independent crypto reporter Amy Castor, who has been covering cryptocurrencies since 2016, believes the BUSD crackdown is aimed squarely at the world’s largest crypto exchange, Binance: 

“Going after Paxos-issued BUSD is part of a much broader crackdown on crypto. They are going after the jugular, and they plan to cut off the blood supply.”

She continues, “They want to kill BUSD because BUSD is critical to Binance, which is the largest offshore crypto casino. Binance auto-converts every U.S. dollar and stablecoin to BUSD (the pegged version). Now they’ll have to find something else to auto-convert to… probably Tether. So, maybe the authorities will target Tether next, something that has been a long time coming.”

Even before these regulatory moves on BUSD, various indicators showed a large redemption of stablecoins between September 2022 and February 2023. Could a bank run on redemptions lead to a significant stablecoin depegging event? Some think so, pointing to convoluted cash reserves held by stablecoin treasuries, the need for third-party audits, and the uneasy relationship between stablecoins and the U.S. Treasury. 

So, how stable are stablecoins? 

Types of stablecoins

A stablecoin is just a token pegged to the value of an asset, an algorithm or a fiat currency. They’re hugely popular as a de facto working capital for traders or as a safe haven to cash out, with the total value settled using stablecoins last year hitting $7 trillion — that’s more than Mastercard. 

As of Feb. 10, the three big dollar-denominated fiat-collateralized stablecoins (USDT, USDC and BUSD) represent almost 12% of the total crypto market cap and account for 91.58% of the entire stablecoin supply.

Given that the U.S. dollar is the global reserve currency, stablecoins gravitate toward it as a peg, but there are other categories. Asset-collateralized stablecoins use real-world assets, such as…