Binance BUSD Problem 2023
Binance, the biggest crypto exchange, said it had problems with its special digital money called BUSD.
BUSD is a stablecoin tied to the regular U.S. dollar, but Binance admitted its system had flaws.
The issue left Binance Smart Chain BUSD undercollateralized by at least $1 billion, causing it to not stay equal to the dollar three times.
The process of keeping BUSD equal to the dollar involves many teams, and sometimes there were delays, according to a Binance spokesperson.
BUSD on Ethereum is checked by a company called Paxos, but on Binance's blockchain, it's not regulated by an external, audited company.
Binance claims to keep BUSD fully collateralized with Paxos-regulated BUSD, calling it Binance-Peg BUSD.
However, data revealed that the Binance-Peg BUSD wallet on Ethereum often had less money than the amount circulating on Binance Smart Chain. Between 2020 and 2021, the difference in Binance-Peg BUSD amounts on the two chains surpassed $1 billion three times.
Binance admitted delays in getting the right collateral but said they fixed the pegging process with enhanced checks.
Stablecoins like BUSD aim to bring trust and stability to the crypto market by linking their value to assets like the dollar.
In the past, unstable collateralizing of stablecoins caused problems in the crypto world, like the collapse of Terra's UST in May, wiping out $40 billion.
After FTX's collapse in November, Binance promised more transparency, but a former SEC regulator criticized their plan, and auditing firm Mazars dropped Binance.
More concerning than Binance's admission of undercollateralization is the possibility that it happened in undisclosed ways.
Binance said BUSD is locked in an Ethereum wallet before being circulated as Binance-Peg BUSD on other blockchains, but questions arise about the large circulation without the corresponding lock-up on Ethereum.
There's speculation that Binance might have had a way to create uncollateralized Binance-Peg BUSD through undisclosed methods.
In summary, Binance faced problems with its stablecoin BUSD, leading to undercollateralization and deviations from its peg to the U.S. dollar. Despite efforts to rectify the situation, concerns remain about the transparency and mechanisms involved in the process, raising questions about the stability of Binance's stablecoins in the crypto market.