What is BUSD? Recently, many questions have been asked about the security and soundness of products in the crypto space. There have been many questions about stablecoins in general, so this article is intended to explain BUSD.
Above all, the BUSD is a stablecoin pegged to the United States dollar (USD) which is the result of a partnership between Binance and Paxos. BUSD is issued by Paxos Trust Company, an NYDFS-regulated entity, on the Ethereum blockchain.
This regulated status comes with certain conditions attached that restrict the actions Paxos is allowed to take. This is in addition to the fact that the NYDFS has the power to assess Paxos operations and oversee the stablecoin.
The BUSD is designed with three important areas in mind: high quality reserves, audits and regulation. Here are some of the key principles of BUSD management, stated in simple terms:
BUSD reserves are for token holders
Reserves do not belong to Paxos or Binance. Rather, they are for the benefit of BUSD holders. This means that Paxos does not hold the principal of the BUSD reserve, does not mix it with corporate funds, does not have the ability to use these funds for other purposes and must be able to identify and to clearly separate the reserve at all times.
In short, it must be separate and secure. In the event of Paxos bankruptcy, the reserves are intended to benefit BUSD holders, not Paxos’ creditors.
Paxos also uses major financial market custodians to hold the securities in the BUSD reserve, which means that even if everyone at Paxos were to cease to exist, these securities and the dollars on deposit in the banks are still identifiable and retrievable. for the benefit of token holders. Even in the unlikely event that this happens, the assets are safe and secure, and another entity will be appointed to unwind the reserves and return the money to the BUSD holders.
Prudent management of BUSD reserves
BUSD is a US dollar stablecoin, and Paxos and Binance believe that BUSD itself should be as close to the blockchain representation of a dollar as possible. This means that BUSD reserves are kept extremely conservative, in the kinds of instruments that worked well even during the 2008 financial crisis. Additionally, beyond Paxos’ preference, NYDFS rules and regulations prevent Paxos to invest reserves in a more aggressive fashion beyond the assets listed here.
So what is in store, exactly? What follows:
- US Treasury Bills with a maturity of 3 months or less. Treasury bills are obligations of the US government itself, backed by the full faith and credit of the United States. So far, the US government has never failed in its obligations. Equally important, by keeping the maturity of the instruments very low, even large movements in interest rates have little or no impact on the value of the Treasuries themselves.
- Overnight Reverse Repo, which is an overly complicated way of saying fully secured short term loans. ON Reverse Repo looks like this in economic substance: Paxos has liquidity in reserve. Paxos lends this withdrawal, overnight, to a creditworthy bank. However, banks, even good ones, sometimes fail. To provide additional security, Paxos also holds collateral provided by the borrower in the form of US treasury bills for a greater value than the loan, and if the loan counterparty fails, Paxos can liquidate the treasury bills to recover the funds.
- Bank deposits. That’s exactly what they look like: dollars on deposit in banks. There are two varieties in the BUSD reserve. The first concerns the amounts of custodian banks that hold securities for Paxos, because sometimes these securities mature and must be reinvested, or pay coupons or other interest. The second relates to amounts in banks that run fast payment networks, which facilitates Paxos’ ability to provide 24/7 minting and burning services for the stablecoin as traditional banking and stock markets are only open about 25% of the time (on a weekly basis) while the stablecoin works 100% of the time. For the latter, Paxos also takes out private market insurance on deposits in the event of bank failure.
That’s it! No other substances are allowed to be on reserve. There are also a few other investment restrictions to keep the reserve as safe as possible:
- No leverage. Paxos cannot borrow against the securities and invest them further, or otherwise expand the balance sheet to increase risk.
- No credit risk instruments (except as noted above with bank deposits). Paxos can only invest in the above list and therefore cannot own commercial paper, corporate bonds or the like.
BUSD reserves are transparent
When you own a stablecoin, you should know what’s inside. Paxos discloses stablecoin reserves on a monthly basis, allowing anyone to verify that BUSD is 100% backed by cash or cash equivalents.
First, Paxos produces monthly unaudited reserves within five business days of the end of the month. The rapid dissemination of information to the public allows all token holders to have immediate knowledge of the investments in progress.
Second, the attestation, in which an auditor reviews Paxos holdings and provides an attestation as to the accuracy, completeness and fairness of the disclosures (now including a review of unaudited holdings). The exam is conducted in accordance with the certification standards established by the American Institute of Certified Public Accountants.
In short, BUSD is conservatively invested, bankruptcy is remote, transparent and, from a financial product perspective, rather boring. This is a feature, not a bug, because in times of uncertainty, simplicity and transparency matter more than when times are good and all prices go up. BUSD is designed to be as resilient as possible in a downturn.
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