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Binance has converted over 800 million BUSD from its Recovery Fund to other cryptocurrencies amid heightened U.S. scrutiny on stablecoins. Regulators like the SEC and CFTC are looking to enact strict rules on stablecoins and other cryptocurrencies.

The recent scrutiny and FUD (fear, uncertainty, and doubt) surrounding Binance and its affiliated BUSD (Binance USD) stablecoin have raised questions about its safety and reserves as a digital asset.

While it is true that regulatory scrutiny and negative press can cause fluctuations in the value of any digital asset, it is essential to understand the specific concerns and evaluate the overall safety of BUSD as an investment.

One of the main concerns surrounding BUSD is its association with Binance, a cryptocurrency exchange that has faced increased regulatory scrutiny in recent months. The exchange and its CEO, Changpeng CZ Zhao, have been accused of trading violations by the United States Commodity Futures Trading Commission.

On top of the CFTC allegations, the chief executive alsofacesa $1B lawsuit for promoting unregistered securities. But the drama continues to see new twists and turns. Of late, unverifiedrumorscirculated about Zhao being issued an Interpol Red Notice, insinuating that hes wanted for arrest.

As a result, some regulators have restricted or banned Binances operations in their jurisdictions. Consequently, many users rushed to pull their funds off the exchange,accountingfor more than $1.5 billion per its March report.

Despite the Binance team taking steps to clear the air, its native BNB coin witnessed a 4% price plunge that has since mostly recovered.

But this isnt the onlygray patchregarding Binance and its operations.

Its important to understand that there are two versions of the Binance stablecoin a Binance-pegged BUSD and the Ethereum-based Paxos-backed BUSD stablecoin. The stablecoins collective collateral backing may not be fully transparent according to findings.

On Jan. 11, Binances representativeconfessedflaws and early operational issues with its BUSD stablecoin. The acknowledgment by Binance comes as the exchangefaceda mountain of public scrutiny over its finances and missing collateral.

Later the following month, Paxos, the BUSD token provider,endedits partnership with Binance. Aligning with the regulators notice, Paxos halted minting BUSD, which directlyaffectedthe stablecoins peg to the U.S. dollar. The situation worsened after witnessing the failure of three crypto-friendly banks.

Amid the concern mounting around stablecoins, Changpeng Zhaoasserted that with the changes in stablecoins and banks, the exchange will be converting the remaining $1 billion funds in its Industry Recovery Initiative to native crypto. These cryptocurrencies included BTC, BNB, and ETH.

Theswap, per Binance, wasnecessaryfollowing Paxos decision to stop minting BUSD, resulting in a gradual market cap reduction. The BUSD supply continues to fall, down to around $113 million worth of BUSD left in the Binance Fund Wallet.

Overall, Binance has converted over 800 million BUSD to other cryptos from its Recovery Fund. This triggered an array of narratives. Some replies to Zhao compared the situation to what FTX was doing before its downfall.

Further concerns were raised after areportaccused Binance of commingling different types of assets in the same corporate wallets.

The worlds highest-volume crypto exchange exiting its own stablecoin amid heightened U.S. scrutiny has caused a lot of panic. The exchanges mass stablecoin withdrawals were shown in a recent Glassnode report.

The graph above shows that Binance Net Flow Volume for all stablecoins has recently seen larger outflows than inflows to the tune of -$295M/day, which is the largest net outflow in history.

Zooming in, BUSD lost a massive chunk in dominancecomparedto stablecoin rivals USDT and USDC. Many investors redeemed or converted BUSD into other assets, driving the total BUSD supply down by -52% to $7.7B, Glassnode added.

At the time of writing, BUSD is trading slightly under its peg at $0.9996. BeInCrypto reached out to Binances team for comment but hasnt received a reply.

One crypto analyst,Adam Cochran, told BeInCrypto:

I dont think Binance is anywhere near as bad as FTX in terms of brazen misuse of funds or having like $0 backing. But I also dont think its 1:1 and safe, and I wouldnt assume BUSD to be $1 when its sitting on an exchange or on BSC.

Can the situation really go from bad to worse, given the uncertainty around stablecoins?

Binance, directly or indirectly, was forced to cut BUSD supply amid regulatory chaos. U.S. regulators have been taking a closer look at centralized stablecoins like BUSD. In fact, the U.S. Treasury Department proposed new rules requiring stablecoin issuers to maintain reserves of the underlying assets backing their coins. They must also provide regular reports on those reserves to regulators.

The main concern is that stablecoins could risk financial stability if assets of sufficient quality and liquidity do not adequately back them. Regulators worry that if a stablecoin issuer were to experience financial difficulties, it could trigger a run on the stablecoin and cause widespread market disruption.

In response to these concerns, Congress isworkingon a bill that could make stablecoins depegs a thing of the past. The McWaters Bill aims to incorporate three key points: Mitigating the risk of future depegs, making sure stablecoins are NOT classified as securities, and wresting stablecoin regulation from the SEC.

Overall, the bill could inject much-needed clarity for stablecoins.

Following the Trust Project guidelines, this feature article presents opinions and perspectives from industry experts or individuals. BeInCrypto is dedicated to transparent reporting, but the views expressed in this article do not necessarily reflect those of BeInCrypto or its staff. Readers should verify information independently and consult with a professional before making decisions based on this content.

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Binance Faces Backlash Over BUSD Operations Amid Scrutiny - BeInCrypto