Decentralized Finance Sector Suffers as a Result of Crypto Stablecoin Regulation

There are ripple effects in the world of decentralized finance due to Paxos Trust Co.'s decision to cease issuing more of the Binance-branded stablecoin BUSD amid pressure from US regulators.

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As a replacement for so-called centralized finance, advocates of what they call DeFi have long championed the system - which enables people to borrow, lend, and trade without intermediaries and often anonymously through the use of automated protocols - as the future of money.

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The biggest concerns raised by the Paxos pullback are centered around the Binance-sponsored BNB Chain, which has the highest BUSD usage in DeFi as well as the most concerns raised by the Paxos pullback.

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“With the BNB Chain being used for DeFi projects, we are likely to need to pivot to a different stablecoin as the primary source of liquidity as the ecosystem moves forward,” Andrew Thurman, a researcher at Nansen, said about the BNB Chain.

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A stablecoin, such as the BUSD, Tether's USDT, and Circle's USDC, is a crypto token that is able to hold a specific amount of value, such as a dollar, for example. Some of them are backed by reserves such as cash and bonds and some of them are not and come in many different forms. Stablecoins are often used as a method to store funds while a crypto trade is being carried out, with around $136 billion now in circulation in stablecoins.

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Generally speaking, BUSD - the third-largest stablecoin by market value - has a relatively small presence in DeFi, said Riyad Carey, a research analyst at the crypto data firm Kaiko, which tracks stablecoins.

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There were approximately $10 million of BUSD in the BUSDv2 pool on the decentralized exchange Curve Finance, for example, which is the biggest liquidity pool that traders use to swap the stablecoin with other tokens on the exchange, for example.

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There has been some regulatory action against BUSD so far, but it appears that it is a “safe sunset process” for holders of BUSD, according to Curve Finance founder Michael Egorov.