Yesterday Binance, the world’s largest cryptocurrency exchange, announced a ‘strategic partnership’ with stablecoin issuer Circle. It’s not the most obvious tie ups for a couple of reasons. Circle is the issuer of the world’s second largest stablecoin, USDC, with a market capitalization of $41 billion.
Many stablecoins have been associated with particular cryptocurrency exchanges. Circle’s USDC is Coinbase’s stablecoin because the two companies founded the stablecoin together via the Centre Consortium, which has since been disbanded. Coinbase has a stake in Circle and still receives interest on the stablecoin’s reserves. In the nine months to September 30, Coinbase earned $685 million from USDC, around 17% of its revenues. So in theory Binance’s use of USDC will provide profits to its largest competitor. That’s probably not the case in practice, which we’ll come back to.
Until not too long ago, Binance had its own stablecoin BUSD that was issued via Paxos. In early 2023, Paxos’ regulator New York State Department of Financial Services (NYDFS) instructed Paxos to stop issuing new BUSD stablecoins, with the balance wound down over the following year. The BUSD stablecoin balance was $16 billion, with $13.5 billion held by Binance.
According to Bloomberg sources, Circle had allegedly reported issues re BUSD to the NYDFS. So if you believe the Bloomberg report, potentially there was also bad blood with both Paxos and Binance.
It seems the hatchet has been buried on the Binance side. Until that point, Paxos was considered the safest pair of hands because it operates a regulated trust for stablecoin issuance, whereas Circle does not. PayPal uses Paxos as its stablecoin issuer. Paxos had been announced as a partner of EDX Markets, the institutional exchange founded by Schwab, Citadel Securities and others. However, Paxos was dropped. It’s unclear whether that change had anything to do with the BUSD saga.
What’s changed in the stablecoin world?
Despite this history, there are several potential reasons for the tie up, the most obvious one being it makes business sense.
Last month Paxos announced the Global Dollar (USDG), a new stablecoin launched out of Singapore. The Global Dollar wants to incentivize distribution partners by sharing the interest earned on the reserves. So far Paxos has signed up Robinhood, Nuvei, Kraken, Anchorage Digital, Galaxy and Bullish.
It would be very hard to imagine that Binance wasn’t one of the Global Dollar’s biggest targets. That meant Binance was in a strong bargaining position when Circle came knocking.
One can only imagine that Circle must have offered a very attractive deal.
Not only does Binance plan to make USDC available for its 240 million clients, it will also use the stablecoin for its own Treasury. In other words, hold its own assets in USDC, which is likely to be in the billions.
We’re guessing that Coinbase will earn negligible amounts, if anything, from Binance’s usage. Coinbase’s quarterly report says that the USDC stablecoin revenue “depends on a variety of factors, including demand for our subscription and services offerings, demand for USDC, the balance of USDC on our platform, interest rates, and ongoing relationships with third parties, such as the issuer of USDC.”
Another recent change is Binance has a new CEO after founder Changpeng Zhao (CZ) stepped down following the Binance settlement with the US authorities over anti money laundering violations.
A third factor is Europe’s MiCA regulations. Tether has been the main stablecoin trading pair on Binance. And Tether has no intention of complying with MiCAR. With the new Binance CEO prioritizing compliance and Circle launching a European version of USDC, it might make sense to use USDC in Europe.
What they said
Unsurprisingly, the two companies were complimentary about each other in the announcements. Beyond the stablecoin, Circle has developed infrastructure to support real world payments. Binance said that Circle will provide it with the technology, liquidity and tools.
“With Binance rapidly becoming the world’s leading financial super app, and stablecoin adoption and utility at the core of this future financial system, this is a tremendous opportunity for USDC as it becomes ubiquitous on the Binance platform,” said Circle CEO, Jeremy Allaire. “I’m thrilled to be working with the Binance leadership team as they continue to build the largest digital asset company in the world.”
This is a massive win for Circle. But it remains to be seen the extent to which USDT trading pairs will be replaced by USDC.
Given Circle is planning an IPO and has already confidentially filed a prospectus, big announcements like this are often a prelude to pulling the trigger.
