What a stablecoin promises, and who can revoke it

Graduate · enrolled learners

This lesson opens with Binance USD (BUSD), February 2023.

What happened

BUSD was a dollar stablecoin issued by Paxos, a regulated New York trust company, and it was fully reserved: every token was backed by dollar-equivalent assets a holder could redeem. By early 2023 it was one of the largest stablecoins in the world, with a market value on the order of 16 billion dollars. In February 2023 the New York Department of Financial Services ordered Paxos to stop minting new BUSD, and the Securities and Exchange Commission signaled it viewed the token as an unregistered security. Paxos, which honored redemptions throughout, began winding the token down, and BUSD shrank toward zero over the following year. Holders were largely made whole, which is why the direct loss recorded here is zero, but a 16 billion dollar stablecoin ceased to exist. Nothing about BUSD had broken: it did not lose its peg, its reserves were real, its redemptions worked. It was ended by the decision of the issuer's regulator, and that is the risk this lesson is about.

The decision point

A fiat-backed stablecoin makes a two-part promise: that one token is worth one dollar (par), and that a holder can redeem it for a dollar (redemption). Most attention goes to the first part, the peg, and to the failure mode where it breaks. BUSD is the reminder that the promise sits on a third thing nobody prints on the token: the continued existence and cooperation of the issuer, and the regulator standing behind the issuer. BUSD kept par and honored redemption the entire time and was still ended, because the New York regulator ordered its issuer to stop, so the token you held was sound and impermanent at once. Issuer risk is therefore broader than depeg risk: it is the risk that the entity behind the token, or the authority behind that entity, can stop minting it, freeze it, or wind it down regardless of how healthy it is. So the decision a holder or a business makes is to evaluate not only whether a stablecoin can keep its peg but whether its issuer and jurisdiction can keep it alive, because a stablecoin's health and its permanence are different questions, and BUSD answered the first yes and the second no.

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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