The stablecoin wars are heating up, and Circle and Coinbase’s USDC could be in for a rough time.
As the market shrinks, Binance, the world’s largest cryptocurrency exchange, has fired a shot across the bow of the USDC stablecoin. On Monday (Sept. 5), it announced that it will no longer list the No. 2 dollar-pegged token, effectively booting it off the dominant crypto marketplace.
This will be a big blow to USD Coin, which has not only been seeing more use in lubricating the trading of cryptocurrencies — the main use of stablecoins — but has also been increasingly used as a payments token.
“A lot of the volume has shifted over to stablecoins as opposed to using bitcoin or Ethereum or the more volatile cryptos to make purchases,” Stephen Pair, CEO of crypto payments technology firm BitPay, told PYMNTS’ Karen Webster in late August.
Read more: BitPay CEO Says Stablecoin Payment Volumes Doubled in 2022
Stablecoins now account for as much as 25% of the payments it processes — twice what it was at the beginning of the year.
That said, stablecoins are under fire from regulators and elected officials around the world. Many of them view stablecoins as a threat to national currencies and are instead turning to central bank digital currencies to counter them.
Home-Field Advantage
Binance has its own stablecoin, BUSD, which is No. 3 by market cap with about $19.5 billion extant — up from about $13.6 billion a year ago. In the last year, USDC has seen its market capitalization expand dramatically to $52 billion from $28 billion over roughly the same period.
No. 1 Tether’s USDT has had a very different year, growing from a market cap of $67.5 billion to about $83 billion in May, when the TerraUSD algorithmic stablecoin’s collapse shone a spotlight on the makeup of Tether’s backing reserve.
Learn more: Tether Audit, Promised for 5 Years, Still Months Away, CTO Says
Binance is also delisting the far smaller Paxos’ USDP and TrueUSD (TUSD). All three tokens held by Binance customers will be swapped for Binance’s BUSD on Sept. 26, and it will stop accepting new trades and futures contracts on Sept. 29. Token holders will continue to be able to withdraw USDC, USDP and TUSD from their accounts, but those will be denominated in BUSD.
It isn’t clear whether Binance will take a similar action against USDT, which is far and away the most used stablecoin for actual trading. USDC may be catching up on the number of stablecoins held by investors, but its 24-hour trading volume on Sept. 6 was just $7.5 billion, compared to USDT’s $51 billion.
BUSD’s 24-hour trading volume was $8.8 billion — more than 20% higher than USDC’s — with most of it from trading on Binance, which give a sense of how dominant the exchange is. Between the spot and derivatives markets, Binance’s 24-hour volume was $72 billion — much higher than any other exchange.
Circle CEO Jeremy Allaire had another perspective, saying on Twitter that the move would be good for USDC because users can still deposit USDC on Binance, but have it show up as BUSD — making it easier to buy more cryptocurrencies because all but the largest tokens were not sold or “paired” with USDC. It will, he predicted, help USDC gain market share from USDT.
Usage Slipping
Binance’s power play comes as stablecoins have been slipping, according to Morgan Stanley International analyst Sheena Shah, Seeking Alpha reported Sunday.
In a recent client note, Shah wrote, “The availability and demand for stablecoins is an indicator of liquidity in the crypto markets and a sign of the size of the demand to increase crypto leverage.”
That leverage, she added, “fueled the 2020/21 bull market.”
But stablecoin usage is definitely shrinking. USDC’s market cap began declining in February but peaked briefly in May, when the TerraUSD algorithmic stablecoin and its partner token, LUNA, collapsed in a $48 billion crypto bank run.
After losing about $5 billion, USDC’s market cap quickly spiked by another $7 billion in a month, beginning on May 9, the day TerraUSD began losing its dollar peg. It reached $60 billion, but has since declined again to $52 billion.
USDC’s fortune came at the expense of Tether’s USDT, which dropped from $83 billion on May 9 to $66 billion at the end of June — down $17 billion. Assuming USDC got $7 billion of that, there’s still another $10 billion that was scared out of the market.
So despite some downturn as the crypto market worsened over the past four months, USDC was in a pretty good position to keep taking market share from USDT. But with Binance suddenly off limits, USD Coin’s future looks a bit more precarious, at least in the short term.
However, if it can keep expanding that small-but-growing market of crypto owners spending stablecoins and crypto instead of just trading and holding it, it may be able to win back any losses Binance inflicts.
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