The price volatility that has been experienced in the crypto sector since 2022 has shown the need for stablecoin issuers to hedge against their cryptocurrencies to avert potential disastrous eventualities such as implosions. Still, the market has a clear memory of the impact of the Terra USD crash on the crypto market in particular and the digital sector in general. This article discusses Binance’s initiative to introduce a recovery fund for its stablecoin Binance USD (BUSD).
Binance to convert the recovery fund into a few cryptocurrencies
Recently, Binance announced that it will convert the $1 billion recovery fund from BUSD to a few major cryptocurrencies which include (Binance USDT) BNB, Bitcoin, and Ethereum crypto (ETH). Historically, Binance created the recovery fund in 2022, following the collapse of the FTX. There are several reasons why Binance has decided to convert the recovery fund to the three cryptocurrencies.
Binance to convert $1 recovery fund to BTC, ETH, and BNB- Twitter
What Has Changed with Stablecoins?
The depegging of USDC, the United States Securities and Exchange Commission’s (SEC) regulatory oversight, and the three bank runs have influenced Binance to convert its recovery fund into three major cryptocurrencies.
Definitely, the latest drama surrounding the depegging of the USDC is one of the primary reasons for Binance to convert the recovery fund to three top cryptocurrencies. The crash of Silicon Valley Bank led to the depegging of the USDC. Specifically, the USDC depegged to $0.87 when Circle announced that Silicon Valley Bank, one of the top 20 banks in the United States, held its $3.3 billion.
USDC coin – Robinhood
The reaction of the crypto market to the banking relationship between SVB and Circle is understandable considering that recently another major United States bank, Silvergate had closed down due to the prevailing macroeconomic environment, mismanagement, and its LINK to digital assets like cryptocurrencies.
Further to this, the depegging of USDC led to the slipping of the other stablecoins like DAI, USDD, and Frax, from their 1.1 ratios with the United States dollar (USD). Therefore, the domino effect of the USDC depeg could have influenced Binance to reconsider how it wants to maintain its $1 billion recovery fund.
As you note, the collapse of Silvergate Bank, Silicon Bank, and later Signature Bank has indicated that banks may lose the reserves that back the stablecoins leading them to depeg. Therefore, keeping the reserve in major cryptocurrencies like ETH and BTC is a sure way of preserving the fund. Of course, there is a dark side in that the value of the fund may decrease with the fall in the prices of these cryptocurrencies.
The recent legal scuffle between Paxos, the issuer of Binance BUSD, and the U.S. Securities and Exchange Commission (SEC) shows how much regulatory authorities are now involved in monitoring and controlling the activities related to stablecoins. A few weeks ago, the SEC accused Paxos of violating investor protection laws. That stand-off forced Paxos to stop minting BUSD.
The History of The Binance Recovery Fund
The collapse of FTX which was confirmed by the declaration of bankruptcy on 1 November 2022 became a turning point in the history of stablecoins. At that time, the major concern was a possibility of a serious negative domino effect within the entire crypto sector which, however, would also affect the stability of stablecoins.
Soon after the collapse of FTX, Binance announced that it was launching a crypto recovery fund used to buy distressed cryptocurrencies in order to curb any potential negative spillover effects.
During an interview with CNBC’s Dan Murphy at Abu Dhabi Finance Week, Changpeng Zhao (CZ) gave the key reason behind the recovery fund. He said, “We want the strong industry players today to protect the good industry players who might just be hurt short term.”
He added, “That’s not to say we can save everybody. If a project is mismanaged on multiple fronts we won’t be able to help them anyway.” Basically, therefore, the aim of Binance is to protect crypto projects which are good in many respects but are constrained by limited resources to the extent of facing bankruptcy.
The Crypto Community’s Reaction to The Launch of The Recovery Fund
Overall, the crypto community supports the introduction of the crypto recovery fund to support distressed, yet promising projects. Some crypto enthusiasts have made several posts on Twitter expressing their appreciation of Binance’s move.
A crypto fanatic with a Twitter username @CryptoViv believes that the fund helps the industry to recover as well as to reassure the users that the sector is considerate about the viability of crypto projects.
Establishing a crypto fund is a step in the right direction- Twitter
Gate.io Recovery Fund
Binance is not the only crypto firm that has launched a recovery fund. Currently, Gate.io, one of the leading centralized crypto exchanges, has introduced a $100 million industry liquidity support fund to assist decentralized projects that will be facing liquidity problems.
Gate.io liquidity support fund – Twitter
Notably, this fund is available to a diverse section of the crypto community including market makers, trading institutions, listing projects, and some of its institutional clients.
As a benchmark, Gate.io will offer up to $10 million as support to financially distressed crypto projects that have good visions and use cases. In the meantime, Gate.io invites other industry participants to contribute to the fund with the aim of growing the industry.
In summary, Binance introduced a crypto recovery fund in November 2022 as a response to the collapse of FTX. This fund will support projects which have good visions and growth potential. Although the fund first existed as BUSD, it has been converted to ETH, BNB, and BTC.