When the FTX crypto exchange crashed last year, attention turned to the largest exchange, Binance. People were concerned about the amount of the Binance USD (BUSD) stablecoin the exchange holds because they thought it was self-issued. That is not entirely correct. Binance outsources the issuance of BUSD to New York-regulated trust company Paxos, which takes a conservative approach towards reserve assets, keeping them in cash or Treasuries.

However, Paxos is only responsible for the issuance of BUSD on Ethereum, not the other four blockchains on which BUSD is available. “The NYDFS must approve our BUSD operations, including the blockchains on which BUSD tokens can be listed,” Paxos told us via email. “Today, BUSD is approved for issuance on Ethereum only. Paxos is not involved in managing or supporting packaged versions of BUSD.” And he makes it clear on the Paxos website.

Binance issues BUSD on other chains, including its own Binance Chain blockchain. Together, these amount to about a third of the total issuance of BUSD. Do not create it out of thin air, but use the Ethereum BUSD as a 1:1 backing asset. This wrapping of a token so that it can be used on another blockchain network is commonplace in cryptography, but it is not without risk. The most obvious are who holds the keys to the wallets and how to ensure 1:1 backup is in sync.

The non-ethereum BUSD stablecoin was not always 100% backed

It turns out that BUSD on other chains was not always supported 1:1 in the past, though Binance said it rectified the process last year. He claimed the issues were a timing difference and he rebalances more regularly now.

Binance locks BUSD on Ethereum on a specific wallet and issues BUSD on the other chains, with Binance Chain making up the majority. Currently, this ‘Binance-peg BUSD’ represents $5.44 billion, a third of the total $16.3 billion on the Ethereum chain.

In the blog post on the backing asset mismatch, Binance refers to BUSD issued on the other chains as Binance-Peg BUSD or PBUSD. But on the blockchains themselves, they are listed as BUSD. The same brand as on the Ethereum chain.

Blockchain explorers have a disclaimer for BUSD that is linked to BUSD. “It is not issued by Paxos or regulated by the NYDFS,” the disclaimer reads. But how many people will see the explorer, especially if they have stablecoins on an exchange?

BUSD is not the only stablecoin where the central issuer is not responsible for issuance across all chains.

USDC is another example of the stablecoin coming together on the popular Polygon blockchain. However, this only accounts for about 2% of USDC’s $41 billion issuance. USDC issuer Circle provides USDC bridging terms of service that allow those with a Circle account to redeem Polygon USDC for dollars.

However, Binance also wraps almost $900 million USDC into Binance Chain, which is not directly covered by Circle’s terms of service.

Using the same brand when there are different risks results in potential consumer misconceptions because they do not appreciate the difference.

What is the solution?

There is a big difference in trust between an issuer that is a regulated trust company like Paxos and an unregulated blockchain startup that decided to wrap tokens. For all we know, the startup could make wallet keys available to all staff in Slack. Supposedly FTX did something similar.

The wrapped Bitcoins are tradable on the Ethereum network. The symbol is not BTC. It’s wBTC. So an obvious solution is a brand indicator for the wrapped stablecoins instead of some obscure disclaimer that a user might never see. So ‘Binance-Peg BUSD’ should be something like wBUSD or pBUSD. The same goes for USDC in bridging.

Whether or not that will make a difference remains to be seen. After all, Tether remains the most popular stablecoin despite evidence that it hasn’t been fully supported at all times.

Fiat-backed stablecoins are meant to be lower-risk tokens, so there is a need to be more conservative. It is generally accepted that issuers should be regulated. But what about organizations that wrap stablecoins? It is still possible to achieve composability, such as creating stablecoin-based programmable money without handing out keys for large amounts of digital currency.

In other related news, there are reports that one of Paxos’ regulators, the New York State Department of Financial Services (NYDFS), is investigating Paxos. However, a NYDFS spokesperson told Bloomberg that he liaises with regulated entities to understand the risks of the crypto market.

Stablecoin fragmentation beyond the wrapper

Aside from multi-chain broadcasting, there is additional potential for fragmentation within a brand. There could be multiple issuers of the same brand of stablecoin on the same chain. Or the same parent company could issue the stablecoin in multiple jurisdictions.

USDC is associated with issuer Circle, but the USDC stablecoin is governed by Center, which originally planned multiple issuers for USDC. With different entities issuing the same brand of stablecoin, issuers will always have different risk profiles.

Regulators in Singapore plan to incorporate some international supervision where a stablecoin is issued in multiple jurisdictions, even if it is by the same entity.

As we have seen with Europe’s MiCA regulations, the crypto-asset sector moves quickly and it is difficult for regulations to keep up. With stablecoin rules in the works in various jurisdictions, it is necessary to consider wrapped stablecoins and other ways in which stablecoins of the same brand carry different risks.