Binance USD (BUSD) is a stablecoin pegged 1:1 to the value of the US dollar. It is issued by Binance in collaboration with Paxos and is authorized and regulated by the New York State Department of Financial Services (NYDFS). BUSD offers users the capacity to transact with various digital and blockchain-based assets while aiming to mitigate the risks associated with volatility. ^[6][7]

Overview

BUSD is a stablecoin pegged to the US dollar at a 1:1 ratio through collaboration between Binance and Paxos. There are three variants of the BUSD token: ERC-20 BUSD tokens, issued by Paxos, a regulated entity approved by the NYDFS in partnership with Binance; Binance-pegged BUSD tokens, independently minted by Binance on BNB Chain, Polygon, and Avalanche and linked to BUSD at a 1:1 ratio; and wrapped or bridged BUSD tokens, issued on different blockchains with distinct mechanisms for maintaining their price peg, offering assurances distinct from Binance or Paxos. Overall, BUSD is a stablecoin with versatile features, fully backed by reserves held in dedicated omnibus accounts at insured US banks, in fiat cash, and/or US Treasury bills, including investments in repurchase agreements or money-market funds. ^{[6][8][9][10]}

The key feature of BUSD is its deflationary model, which preserves each BUSD token's 1:1 parity with the US dollar. For instance, when 100 BUSD is bought, an equivalent 100 BUSD is minted for the purchase, and a $100 payment is added to Paxos reserve accounts. Conversely, when someone sells or redeems 100 BUSD, the corresponding $100 payment is deducted from Paxos reserve accounts, and the 100 BUSD received is then permanently removed (burned) from circulation. BUSD is compatible with various ERC-20 smart contracts and also supports BEP-2, ensuring secure and trustless transactions with BUSD. This functionality also enables seamless interoperability across Ethereum-supported wallets or exchanges. ^[7][8]

History

On September 5, 2019, Binance and Paxos unveiled their partnership to introduce the BUSD stablecoin, confirming the approval of the stablecoin by NYDFS. BUSD became purchasable with Paxos USD on September 12, 2019, and was later listed on the Binance platform for trading against Ripple (XRP), Bitcoin (BTC), and Binance Coin (BNB) on September 20, 2019. Following its launch, the stablecoin received a positive response from the community, leading to its expansion to 48 different USD pairs. BUSD has consistently maintained its 1:1 ratio with the U.S. dollar, undergoing monthly audits conducted by Withum, an accounting firm. These audits are compliant with the NYDFS regulatory framework and are publicly available on the NYDFS website. ^[7][8]

In April 2022, Binance donated $2.5 million in BUSD through its charity organization to the USA for UNHCR, a UN refugee agency. This move aimed to demonstrate how cryptocurrency can play a significant role in raising funds and supporting humanitarian aid. However, on February 13, 2023, BUSD faced a regulatory clash after the NYDFS ordered Paxos to stop issuing it. Consequently, Binance was sued by the US regulator, the Commodity and Futures Trading Commission (CFTC), on allegations of offering unregistered crypto derivatives products, which is against federal law. On February 16, 2023, shortly after United States regulatory scrutiny of Paxos and BUSD, Binance minted approximately $50 million worth of TrueUSD (TUSD). Binance ex-CEO Changpeng “CZ'' Zhao expressed intentions to "diversify" the platform's stablecoin reserves away from BUSD. CZ also suggested that ongoing regulatory actions by the United States Securities Exchange Commission (SEC) and the NYDFS might potentially reduce the dominance of US dollar-backed stablecoins in the long run. ^[6][11][12]

“I think with the current stances taken by the regulators on the US dollar-based stablecoin, the industry will probably move away to a non-US dollar-based stablecoin, back to algorithmic stablecoins,” CZ said.

Interestingly, in September 2022, Binance carried out automatic conversions from TUSD to BUSD, aiming to enhance liquidity and streamline capital efficiency for its users. This automated conversion initiative encompassed stablecoins like USDC and USDP. However, on March 17, 2023, Binance made an announcement stating that it had replaced BUSD holdings in its Secure Asset Fund for Users (SAFU), an emergency insurance fund established by Binance, with TUSD and Tether (USDT), assuring users that this action would not impact them. On August 31, 2023, Binance announced the discontinuation of support for BUSD due to NYDFS's directive for Paxos to cease minting the coin. Paxos plans to phase out the stablecoin by February 2024. Binance has indicated its gradual withdrawal of support for the coin at that time. ^{[6][11][12][13]}

As an alternative, Binance encourages its users to convert their BUSD holdings into other available assets, including a newly listed stablecoin called First Digital USD (FDUSD). FDUSD, launched in June 2023 by the Hong Kong-based trust company First Digital Group, made its debut listing on Binance in late July 2023. Binance is offering incentives for users to adopt FDUSD by providing zero-fee trading pairs for FDUSD with Bitcoin (BTC) and Ether (ETH). ^[6][11]

Utility

BUSD can be used for several purposes.

Staking and earning system

BUSD offers users a staking and earning system within the Binance ecosystem. Additionally, BUSD has been utilized for payments across various platforms, such as Alternative Airlines, Ledger Shop, and Proleo.io. Moreover, this fiat-pegged cryptocurrency serves as collateral for loans. It collaborates with BitPay, a Bitcoin payment provider, enabling BitPay’s merchants, including Microsoft, Amazon, and Switzerland’s branch of Takeaway.com, to accept BUSD coins. ^[5]

Maker fees

Binance provides zero maker fees to users trading through BUSD spot or margin trading pairs. Furthermore, all BUSD stablecoin pairs on Binance have zero transaction fees. ^[2]

Trading options

BUSD provides users with diverse trading options, enabling swaps or purchases of various cryptocurrencies. It introduced 48 BUSD trading pairs, such as pairs against the Chinese yuan (CNY), Russian ruble (RUB), and Vietnamese dong (VND). Furthermore, it can be utilized for purchasing NFTs on the Binance NFT Marketplace. ^[1][7]

Margin trading

The increasing versatility of BUSD includes features like Binance Margin Trading, which allows BUSD to serve as collateral for loans. Moreover, various lending products enable users to deposit BUSD and earn up to 15% in annual interest. ^[8]

Stablecoin conversion

The Binance platform implemented a feature enabling users to instantly convert various other stablecoins to BUSD at a 1:1 ratio without incurring fees. This stablecoin conversion feature supports TUSD, USDC, and PAX. ^[7]

Minting and Burning

To maintain the 1:1 reserve of BUSD to the dollar, Binance employs a distinctive minting and burning mechanism. New BUSD tokens are minted and sent to users' wallets when they deposit fiat dollars into the Paxos reserve. For example, if users purchase 1000 BUSD for $1000, 1000 BUSD tokens are minted and transferred to the users' wallets. ^[5]

BUSD operates as a deflationary token, where redeemed tokens in dollars are burned or destroyed, ensuring a token supply that consistently matches the dollar value. ^[5]

Tokenomics

Paxos isn't limited to minting BUSD tokens, resulting in a token supply that isn't fixed. However, it manages the allocation of BUSD, holding the USD reserves that underpin each token. Third-party accounting firms conduct routine audits to verify that the USD reserves align with the total circulation of BUSD tokens. This assurance instills a high level of confidence among users, confirming that every BUSD token is entirely supported by US dollars and can be exchanged for USD at any given moment. In addition, BUSD's token economic structure enables the maintenance of a token supply that is always equivalent to the US dollar, ensuring that the circulating BUSD matches the dollar equivalent. ^[1][14]

Regulations

New York state regulators have imposed specific operational requirements for BUSD and its issuing entities, Paxos and Binance. These requirements encompass full collateralization of the stablecoin, authority over the creation and burning of BUSD tokens, and the ability to freeze accounts and withdraw funds in response to illicit activities. These principles align with the Trust Charter and banking laws of New York pertinent to the stablecoin. ^[1]