Investors rush to Tether as Paxos’ BUSD faces regulatory heat, Curve Liquidity Pools show

If you’ve been following crypto commentators on Twitter since Sunday, you’ve probably read that US financial regulators’ recent actions against Paxos’ centralized, dollar-pegged stablecoin BUSD will push investors toward decentralized, censorship-resistant alternatives.

And while that seems logical, the evidence so far suggests the opposite. Investors seem to be turning their backs on BUSD and its peers USDC and DAI and into Tether (USDT), the world’s largest centralized stablecoin with a market cap of $68.47 billion.

At press time, BUSD accounted for 81% of the total liquidity of $12.81 million in the busdv2 liquidity pool on the decentralized exchange curve, while the other components of the pool – DAI, USDC and USDT – made up the remainder.

BUSD dominance has increased from 69% since early Monday. In comparison, Tether’s presence has fallen to 3%, the lowest in the pool, according to data from analytics tool Chaineye and Curve, indicating an increasing preference for USDT over BUSD and other centralized stablecoins amid regulatory action.

“Investors are fleeing BUSD despite Paxos having given full assurances that its issuance program is fully backed and properly settled,” Ilan Solot, co-head of digital assets at London-based Marex Solutions, told CoinDesk.

Earlier Sunday, the US Securities and Exchange Commission (SEC) said Paxos plans to sue the company for violating investor protection laws. Additionally, on Monday, the New York Treasury Department ordered Paxos to stop minting new tokens. In response, Paxos said it will stop issuing new tokens and process redemptions until at least 2024.

While the regulatory action was BUSD-specific, market participants raised concerns that Circle’s USDC could be next to face the heat, according to Twitter comments and the imbalance in Curve’s pool of 3 consisting of USDT, USDC and DAI .

Tether’s percentage of 3pool has fallen from 24% to 17.5% in two days, hitting levels last seen before the collapse of Terra in May 2022. In contrast, USDC’s share has increased from 38% to 41%. DAI’s share has increased slightly to 40%, data from Dune Analytics shows.

“Theoretically, Curve’s 3 pool should consist of three equal parts of DAI-USDC-USDT. But the pool has become completely unbalanced as investors dumped USDC and DAI for USDT,” Solot said.

The move towards Tether might come as a surprise as the largest centralized stablecoin is perhaps the most controversial given that it is unregulated and the ongoing lack of transparency about its reserves. On Friday, a New York judge denied an attempt by iFinex, cryptocurrency exchange Bitfinex and stablecoin issuer Tether to block CoinDesk’s request for information about the financial reserves backing the USDT token.

The fact that Tether successfully weathered the turmoil created by Terra in May 2021 may have boosted investor confidence in the stablecoin. Either that, or the alternatives are dwindling.

“It’s not exactly confidence that has increased, but the perception that the range of available alternatives is narrowing,” Solot said. “For example, Binance will likely have to scale back its goal of establishing BUSDC as the main base for trading on the exchange. Now it is likely that USDT will remain the primary base.”

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