Binance USD (BUSD) is a stablecoin pegged to the US dollar and supported by Binance, one of the world’s largest cryptocurrency exchanges. Therefore, this coin has attracted a lot of attention. However, the stablecoin market is quite saturated, and BUSD is struggling to surpass its biggest rival, USDT, not to mention the significant FUD it faced in early 2023. So, what is BUSD? How does it work? Is BUSD still a suitable investment at this time? Let’s find out in the content of the article below.
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What is BUSD, and should you buy it?
What is BUSD?
BUSD, fully known as Binance USD, is a stablecoin backed and collateralized by the US dollar. It provides users the ability to trade with digital assets and operate on the blockchain, as well as mitigate the risks created by market volatility. BUSD is one of the most widely used stablecoins in the market today.
Binance USD (BUSD) is issued as an ERC-20 token on the Ethereum blockchain. They are pegged to the USD at a 1:1 ratio, meaning that 1 BUSD can be exchanged for 1 USD at any time, and this USD amount is held in Paxos’s (Binance’s partner) account in a US bank.
Notably, as of now, BUSD coin is one of only three stablecoins approved by US regulators, the other two being GUSD issued by Gemini Trust Company and PAX, also issued by Paxos.
How was BUSD created?
Binance partnered with Paxos, a financial institution regulated by New York, to create BUSD. Binance and Paxos announced their partnership to create the Binance USD (BUSD) stablecoin on September 5, 2019, and it was approved by the New York State Department of Financial Services (NYDFS) on September 12, 2019, and became available for purchase from Paxos.
Note: Although BUSD is named Binance USD, Paxos is the company that issues BUSD. This means that Paxos holds the BUSD reserves and all the US dollars backing BUSD.
On September 20, 2019, BUSD became available on the Binance platform to trade with BTC, BNB, or XRP. It is also audited monthly by the accounting firm Withum as required by NYDFS.
=> As BUSD is managed by institutions, it is less likely to be shut down due to regulations.
Binance also allows users to directly purchase BUSD with fiat currencies including USD, EUR, GBP, JPY, RUB, CAD, VND, and CNY via bank transfer or credit card.
How does BUSD operate?
BUSD is created to be fully collateralized by US dollars, and this US dollar amount is held in US bank accounts on a 1:1 basis. These accounts are created and managed by Paxos, who also conducts monthly audits in compliance with New York state regulations.
Every request to buy or sell BUSD comes with transferring money into or out of the reserve account. Based on these requests, BUSD tokens can be minted or burned accordingly.
Example: A $1,000 BUSD purchase transaction will lead to the minting of 1,000 BUSD coins and an increase of $1,000 in the reserve account. Conversely, selling 1,000 BUSD will lead to burning those BUSD tokens and a decrease of $1,000 in the reserve account as the US dollars are transferred to the person who just sold BUSD.
In case of significant security threats, such as a hack, Paxos has the right to temporarily suspend the transfer, creation, or destruction of BUSD tokens.
While Paxos controls the creation and burning of BUSD tokens, there are also ERC-20 smart contracts operating with BUSD tokens. These smart contracts help provide security for the process as it eliminates the need for third parties and moves transactions to the reliable capabilities of the blockchain network.
NYDFS will supervise and regulate BUSD compliance with the Trust Charter. This ensures that Paxos is complying with all current New York banking laws in its operational processes related to BUSD.
What are the uses of BUSD?
If you own BUSD coins, besides being able to trade, receive, and send cryptocurrency, it also has some features closely associated with the Binance platform such as:
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Reduced transaction fees when exchanging with BUSD on Binance.
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Some lending products on Binance allow you to deposit BUSD to earn interest rates of up to 15% per year.
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BUSD can be used as collateral for Margin, Futures borrowing on Binance.
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Binance allows users to instantly convert from other stablecoins to BUSD at a 1:1 ratio without fees.
Comparison between BUSD and USDT
If you understand what BUSD is, you might be curious about how this coin differs from USDT. In fact, if you trade on Binance, you will see these are the two most popular stablecoins. Let’s compare BUSD, USDT, and USDC for a general overview.
Name | BUSD | USDT | USDC |
Collateral Asset | Fiat-Backed | Fiat-Backed | Fiat-Backed |
Audit Frequency | Monthly | Not Often | Monthly |
Safety Level | |||
Managing Organization | Binance, Paxos | Tether, Bitfinex | Circle, Ltd |
Market Capitalization | $1,803,686,501 | $87,751,045,436 | $24,462,449,286 |
Ranking Stablecoin | 5 | 1 | 2 |
Detailed Assessment |
What are the similarities between USDT and BUSD?
- Value: Both BUSD and USDT are pegged to the US dollar at a 1:1 ratio, so there’s no need to worry about volatility.
Minting Process: The minting process for these two stablecoins is the same. Instead of mining, their respective teams already have fiat currency in reserve, and then they mint tokens for those who need them. - Liquidity: Both have high liquidity and the ability to trade quickly. They can be transferred 24/7 without any bank involvement.
- Transaction Cost: Since these stablecoins are linked to a fiat currency, there’s no need to worry about high transaction fees. The cost of transferring USDT and BUSD is very low.
- Smart Contracts: Both USDT and BUSD operate on smart contracts.
- No Bank Involvement: BUSD and USDT operate without the need for bank assistance.
What are the differences between USDT and BUSD?
However, there are many differences between BUSD and USDT. The biggest difference is:
- USDT has a larger market cap and liquidity, and is available on more exchanges and trading pairs than BUSD.
- The staking profit on Binance for both coins is the same, but USDT can be staked on more DeFi platforms.
- Initially, BUSD was more reputable and safer. Meanwhile, USDT is still facing risks from its team, especially the suspicion that it does not have enough reserve funds. (However, this has changed after Paxos, the issuer of BUSD, faced accusations from the SEC, read more below).
SEC Sues Paxos, and Paxos Stops Minting BUSD
On February 12, 2023, the US Securities and Exchange Commission – SEC prepared to file a lawsuit against Paxos with the allegation that this stablecoin is an unregistered security. The announcement came amid the US’s increased crackdown on crypto activities.
On February 13, 2023, the New York State Department of Financial Services also ordered Paxos to stop issuing BUSD. Subsequently, Paxos announced it would stop minting BUSD from February 21, but users were still able to convert BUSD to USD or PUSD at a 1:1 ratio.
This means that from now on, the supply of BUSD will only decrease, possibly even down to zero. Paxos will allow users to exchange BUSD for USD or PUSD (another stablecoin issued by Paxos, but not under investigation) at a 1:1 ratio and gradually burn BUSD.
=> Against this backdrop, Binance has limited/gradually removed trading pairs related to BUSD. Binance recommends users to transfer all BUSD to other stablecoins. It seems that Binance is gradually shifting to another stablecoin, with FDUSD being the chosen one.
Should you buy BUSD at this time?
Having learned about what BUSD is and the FUD surrounding it, you might now wonder whether you should still buy BUSD?
Should you buy BUSD now?Previously, BUSD was considered a top choice for those who frequently trade on Binance. However, at the current time, we advise NOT to do so. It seems likely that BUSD will gradually be phased out, and Binance will soon find another stablecoin to replace it for the future (possibly FDUSD). Therefore, BUSD is losing its “luster,” and its market cap is gradually decreasing.
For now, you might consider USDT or FDUSD if you are trading on Binance, or consider USDC if you are on other platforms.
Read more:
This is all the information about Binance USD and what is BUSD. We hope this article has helped you understand BUSD and decide whether to buy this coin or not. Thank you for reading, and if you have any questions, don’t forget to leave a comment below for us to answer. We wish you successful investing.