The world of stablecoins is suddenly looking shaky. Seismic shifts may be afoot in the US$137-billion market after New York-based Paxos Trust Company, which mints Binance’s stablecoin, said it would cease issuing new BUSD tokens after US regulators labelled the asset an unregistered security.

The US move has left investors questioning the future shape of the market for stablecoins, tokens that are usually backed by traditional assets like dollars and US treasuries to tame the wild swings that characterise cryptocurrencies.

The immediate impact hasn’t been negative for the stablecoin market as a whole, though; it’s actually seen its total value grow by $2-billion since the Paxos announcement on 13 February.

“There’s way too much demand for dollar-based stablecoins for them to go away,” said Alex Miller, CEO at bitcoin developer network Hiro.

Instead rivals are vying to cash in on the woes of BUSD, the world’s third biggest stablecoin, whose market value has shrunk to $12.9-billion from $16.1-billion, with its market share narrowing to 9.4% from 12.1%, according to CoinGecko.com.

Market leader tether (USDT) has been a big beneficiary, adding $1.9-billion to its market capitalisation to hit $70.3-billion since the news. It now commands 52.6% of the stablecoin market, up from just over 51%.

Circle’s USD coin, the second biggest stablecoin, edged up over $700-million to $42-billion, lifting its market share to 31.3% from 30.9%.

‘And tether wins’

Stablecoins are a key part of the cryptosphere, with their steadier value meaning they’re used as to facilitate transfers between cryptocurrencies or into regular cash. Traders also use these tokens to hedge their positions, and hence dwindling market value is associated with falling liquidity and leverage in the broader crypto market.

Markus Thielen, head of research and strategy at crypto firm Matrixport, said the Paxos announcement and subsequent slump in BUSD had caused a big shift in the stablecoin market. “And tether wins.”

Broader crypto market impact also seems to have been contained with bitcoin rising 14% over the past week to $24 902, shrugging off worries that central banks will keep raising rates.

Among the reasons for the sanguine reaction is that BUSD is largely used to trade on Binance, the world’s largest crypto trading platform, while its usage is limited in other parts of the crypto world, according to analytics firm Kaiko.

“While BUSD is used in DeFi, it is not systemically important to the ecosystem,” Kaiko’s Riyad Carey said.

The developments around Binance’s stablecoin have also boosted trading on competing platforms; since 1 February, Binance’s bitcoin liquidity is down almost 30% while US-based Coinbase’s is up nearly 15%, according to Kaiko.

Daily open interest for bitcoin to BUSD perpetual swaps has dropped from over 17 000 bitcoin at the beginning of February to 13 726 bitcoin, Binance data showed, pointing to traders withdrawing bets on future prices for BUSD.

While some uncertainty remains on the impact of the US Securities and Exchange Commission ruling on other stablecoins, the market appears to have adjusted, according to some crypto players.

“This is unlikely to represent a critical large structural change to the market, for now,” said Vetle Lunde, analyst at Arcane Research. He added: “Enforcement against USDC or the non-US domiciled USDT, could have more dramatic implications.” — Medha Singh and Lisa Pauline Mattackal, (c) 2023 Reuters