By James Davis
On Tuesday, the leading crypto exchange Binance admitted to issues in its pegging system that left the supply of one of its stablecoins, Binance-peg BUSD, undercollateralized by nearly $1 billion. The exchange claims that this stablecoin is backed 1:1 by the USD.
While speaking to Bloomberg, a Binance spokesperson said that several teams are involved in maintaining the peg and that the process has never been flawless. Additionally, according to crypto analysts, Binance’s system issues led BUSD to slip its peg by huge margins thrice.
BUSD held on the Ethereum chain is collateralized by USD in a process administered by Paxos, a financial technology company in New York. But, BUSD on the Binance Smart Chain (BSC), the exchange’s self-developed blockchain, is not regulated by a third-party firm.
To ensure the BUSD on the Binance Smart Chain (Binance-Peg BUSD) is legitimate, Binance alleges that it collateralized the stablecoin with BUSD regulated by Paxos. However, the latest data shows that the exchange did not peg its Binance-Peg BUSD at times.
ChainArgos, a blockchain analytics company, gathered and analyzed the data. According to the firm, a Binance-Peg BUSD wallet on the Ethereum network, which is meant to hold BUSD necessary to back the stablecoin, often had a lower balance than the quantity of Binance-Peg BUSD being circulated on BSC.
Binance Spokesperson Says Firm has Streamlined Pegging Process
The crypto exchange spokesperson has come out to claim that Binance has corrected the pegging process. The spokesperson adds that this process is now refined with advanced discrepancy checks intended to ensure that Binance-Peg BUSD is always one-to-one pegged.
Stablecoins like Binance-Peg BUSD and BUSD are meant to bring stability into the highly volatile and largely uncollateralized crypto market. Firms like Binance make efforts to guarantee customers that their stablecoins will always be stable when other digital assets are exposed to significant swings.
Why it is Necessary for Firms to Collateralize Their Stablecoins
Crypto firms that have ignored collateralizing their stablecoins have caused damage in the crypto industry. For example, in May 2022, Terra’s stablecoin UST wiped out over $35 billion in value because it was not backed by actual cash reserves. The UST collapse triggered the ongoing crypto winter.