Leading cryptocurrency exchange Binance plans to launch a stablecoin within two months, in an apparent challenge to the dominance of scandal-plagued Tether.
Unlike Tether and most of its much smaller competitors, BGBP will be backed by British pounds rather than U.S. dollars, said Zhou. “Only certain portions of the world use the dollar,” Zhou said. “Other users use other currencies, and we feel it should be reflected in stablecoins as well.”
Other Binance stablecoins denominated in major currencies like the yen and euro may be forthcoming, Zhou said. Stablecoins are used by traders when exchanging currencies like bitcoin (BTC) and ether (ETH) to avoid problems caused by standard cryptocurrencies’ price volatility. They are also used to park funds on exchanges.
While Binance’s new stablecoin is being widely called a direct challenge to Tether, whose USDt stablecoin is used in about 80% of all bitcoin transactions, a closer look suggests Binance is looking to use Tether’s weakness to expand the stablecoin market rather than upend it.
“This could be a pretty significant development,” said Mati Greenspan, senior market analyst at asset trading platform eToro. “Binance has a lot of trust and influence within the crypto trading community. Any new products they introduce could potentially be successful.”
Calling BGBP a potential “gamechanger,” Manish Kataria, co-founder of cryptocurrency trading platform Quadency agreed that Binance has the market power to make their new entrant a strong one. “With their scale, a well-executed and transparent stablecoin could easily … give any incumbent or upstart stablecoin project reason to worry.”
Despite that, Greenspan does not think Tether has much to be concerned about—at least from competitors—in the short term. “At the moment, Tether is completely dominant within the market,” Greenspan said. “There is definitely a level of distrust and skepticism around Tether, but it doesn’t seem to affect volumes. Over time, we could certainly see other stablecoins take some of its market share, but its position is safe for now.”
Indeed, Binance’s new stablecoin doesn’t have to beat Tether’s to be successful, argued Greenspan. “The market is growing quickly and significantly, so Binance’s stablecoins could be highly successful without taking away market share from other stablecoins.”
He added it’s important that other stablecoins join Tether. “It’s imperative for the market to grow and for more options to emerge,” Greenspan said. “Tether’s market domination creates serious concentration risk, especially given the regulatory scrutiny around it. It’s extremely healthy for the market to gain a number of new stablecoins.”
Tether’s legal woes
As Greenspan alluded to, Tether is facing more serious challenges. On April 25, New York State Attorney General Letita James announced her office was suing Tether and sister company Bitfinex for fraud and securities law violations.
The suit revealed that Tether had loaned Bitfinex about $650 million out of a $900 million loan facility extended after Bitfinex lost $850 million to an alleged theft. It also forced Tether to admit that USDt was no longer backed 100% by U.S dollars, as it had long bragged. Instead, it was about 74% backed.
James has won a temporary injunction forbidding Tether from loaning Bitfinex any more U.S. dollars, or distributing funds to insiders. Tether is fighting the suit, arguing both that the loan was perfectly legal and that New York has no jurisdiction over a company that does not do business in the U.S.
The more the merrier
While Tether is certainly in a weakened position, it’s hard to see why Binance would launch a stablecoin pegged to the British pound, which is not nearly as dominant a currency on the world financial market as the dollar or even the euro, if it was truly looking for a fight.
For one thing, the pound is hardly the stablest currency right now.
“It’s interesting that the first stablecoin [Binance] released is pegged to the British pound, given its relative volatility to other fiat currencies,” Greenspan said. “We could see the pound depreciate further if a ‘hard Brexit’ were to occur.”
For another, Zhou also said that Binance would encourage other companies to launch stablecoins on the Binance Chain blockchain that its BGBP is being launched on. That’s not the tack that a company looking to take over from a wounded competitor would take.
“Since the success of Tether was anchored on adoption by crypto exchanges such as Poloniex, BGBP has strong potential given Binance’s strong position,” said Paul Puey, CEO of decentralized cryptocurrency wallet Edge. “However, I think they would need to remove support of other stablecoins to truly leverage their position.”
On June 4, Binance did exactly the opposite, giving a leg up to Paxos, creator of a well-regarded but much smaller U.S. dollar-pegged stablecoin, the Paxos Standard Token (PAX).
“Binance remains a strong partner of ours,” said Dorothy Chang, Paxos’ vice president of marketing and communications, noting that on June 4, her company partnered with Binance to make it easier for customers to directly load their account wallets with PAX using U.S. dollars. “We look forward to continued collaboration and innovation with them.”
Nor does she see Binance’s BGBP coin as a competitor, calling it “a very interesting initiative.”
Chang added, “We believe in the strength and the universality of the dollar as the reserve currency for the world, which is why we selected the dollar as our first tokenized asset. We believe that our USD-backed stablecoin, PAX, has broad implications for the future of how money moves—not just in crypto today, but for the real world in the future. We continue to gain momentum and see a world of opportunities ahead of us.”
Paxos has been booming since news of Tether’s problems broke. Its market cap jumped from around $100 million to nearly $200 million within two weeks of James’ suit being announced, before retreating to about $170 million.
Whatever its strategy is with stablecoins, Binance has a great deal of goodwill to build on. CEO Changpeng “CZ” Zhao “has generally been a step ahead of the industry at every turn,”
Kataria said. “So, whatever their approach, it will no doubt directly impact how this important category of assets evolves.”
The long game
Tether and its parent company iFinex, which also owns Bitfinex, is not about to give up its dominance without a fight.
Aside from aggressively battling the New York Attorney General’s lawsuit, Bitfinex flexed its muscles on May 13, announcing that it had raised $1 billion in fiat and cryptocurrency in a private initial exchange offering (IEO) of LEO tokens.
And, Tether’s market cap has also grown since the New York Attorney General’s suit, jumping from about $2 billion to nearly $3 billion.
But, that rise in Tether’s market cap began in early April after a massive issuance of USDt, when the company needed a huge cash infusion to cover its Bitfinex loan. That in turn coincided with a 45% runup in the price of bitcoin in May.
One explanation for that jump in bitcoin’s price is that it was fueled by traders on Bitfinex and other major exchanges fleeing tether by buying bitcoin with it. Despite its volatility, bitcoin remains the best-known and most liquid cryptocurrency.
“Since Tether is insufficiently backed, it means that some of the reserves backing customer assets on exchanges are likely insufficient,” University of Texas at Austin professor John Griffin told Bloomberg last month. An expert in cryptocurrency market manipulation, he added, “smart customers will … pull their crypto off exchanges. This could put further upward pressure on Bitcoin prices as one would rather take fake money [stablecoins] and exchange it to Bitcoin.”
To resolve these problems, Tether has to regain the market’s trust, and fast.
“I think Tether has about six months to give solid, audited proof that they have ample reserves,” said Puey. “Otherwise competitors have a chance to take over.”