Binance acknowledges flaws in BUSD peg, BSC version briefly mints over $1 billion

A spokesperson from Binance confirmed to Bloomberg that there were previous flaws in the pegging mechanism of BUSD on the BSC/BNB Chain, but it has now been fully rectified.

Concerns Over BUSD Reserves

BUSD is issued by the stablecoin issuer Paxos on the Ethereum chain, and Binance generates Binance-Peg BUSD on the BSC/BNB Chain through its own cross-chain, collateral mechanism.

According to Binance's announcement on the generation mechanism and spokesperson's statement, when users buy Binance-Peg BUSD, Binance also purchases BUSD from Paxos, which is locked on Ethereum as collateral reserves backed by an equivalent value of USD.

However, Data Finnovation previously analyzed that there are concerns about under-collateralization of BUSD on the BSC chain. It mentioned that the total supply of Binance-Peg BUSD surged in 2021, but the reserves balance on the Ethereum chain did not match, especially during the period from 2020 to 2021.

Data Finnovation pointed out that the surge in the supply of Binance-Peg BUSD occurred after a significant increase in BNB, and the difference between the collateral reserves and Binance-Peg BUSD exceeded $1 billion.

It emphasized that Binance has established specific processes for "Binance-Peg," but this process evidently does not allow Binance-Peg BUSD to achieve full collateralization. The evidence is on the chain, demonstrating that Binance's established collateralization process is meaningless.

Binance Spokesperson's Response

A Binance spokesperson told Bloomberg that there were past flaws in BUSD's collateralization, but now everything is fine:

The collateralization process involves multiple teams, and in the past, there may have been delays and errors in operation, but the process has been significantly improved. Binance-Peg BUSD is now fully reserved, not only is BUSD on the Ethereum chain unaffected, but users have not encountered any problems when redeeming in the past.

Bloomberg noted that the spokesperson did not specifically mention how long the under-collateralization of Binance-Peg BUSD lasted, nor did they clarify when Binance noticed and resolved this issue.

Binance Official Response

According to Binance's response to this report, they stated that the data discrepancies in Data Finnovation's analysis were due to the real-time rebalancing of the collateralization process not keeping up with the demand for Binance-Peg BUSD.

Binance discovered this situation in 2022 and has since rebalanced more frequently to ensure that Binance-Peg BUSD can provide more transparent reserve data.

Binance-Peg BUSD Not Regulated

In a previous announcement, Paxos emphasized that Binance-Peg BUSD issued by its partner Binance is strictly speaking a product of Binance, not issued by Paxos, and unlike Paxos' other products, it is not regulated by the New York Department of Financial Services (NYDFS).

Dune data shows that the decline in BUSD's market value after November was significantly larger than that of USDT and USDC, with the stablecoin market share dropping from 23% to 16%, a decrease of about 30% in market value.

At the time of writing, Binance founder Zhao Changpeng did not mention Bloomberg's report on Twitter. Zhao Changpeng will hold an AMA on Twitter at 18:00 on January 11th, Taiwan time.

A Binance spokesperson has confirmed that there were flaws in the past collateralization process of Binance-Peg BUSD. Should CZ also address this issue directly instead of continuously asking everyone to ignore FUD on Twitter?

Note: An announcement by Binance regarding the discrepancies in BUSD reserve data was added.

Note: CZ announced the postponement of the AMA.