What is Binance USD? BUSD Explained

•   As of October 2023, three stablecoins represent over 90% of the stablecoin market- Tether USDT, USDC, and BUSD.

The stablecoin of the Binance ecosystem

Binance USD (BUSD) is a fiat-backed stablecoin. A stablecoin is a cryptocurrency with its value pegged to another asset. BUSD is a fiat-backed stablecoin which means that it is backed by a fiat currency, the US dollar, on a 1:1 basis. The US dollars are held in reserve. 

A part of users has been hesitant to enter the crypto world because of its fluctuating market. Stablecoins try to solve the volatility problem of the crypto market. If you are interested in the use of stablecoins, why not read this article: ‘What it is a stablecoin & why do we need them?’. 

One of the reasons why people use BUSD is because it is backed by an equal amount of U.S. dollars. The U.S. dollar is still positioned as the world's reserve currency and strongest fiat currency. Therefore, it provides a sentiment of a stable and reliable option that can successfully survive volatile changes in financial markets

  The idea behind Binance was born during a poker game. The current CEO learnt about Bitcoin at a home-poker game. Intrigued by the concept, he got into crypto and created Binance a few years later.

Binance USD managed to become the sixth highest-ranked cryptocurrency in less than 3 years and positioned itself as one of the most popular fiat-backed stablecoins. On the other hand, Binance is one of the largest cryptocurrency exchanges according to its trading volume so it was a strategic approach to produce a stablecoin that will add up to a mainstream adoption of cryptocurrencies.

What is the BUSD token?

The BUSD token is built on the Ethereum ERC-20 token standard. ERC-20 is the most common Ethereum token standard. If you are not familiar with token standards in general, why not read this article: ‘Crypto Basics: What are token standards?’. 

Since the BUSD token was created with the help of the ERC-20 standard, it is consequently compatible with Ethereum-based smart contracts. However, the token is also compatible with Binance’s BEP-2 standard. In simple words, this means that the BUSD token can be used equally on Ethereum and Binance Smart Chain. 

What is different about the Binance USD stablecoin?

 An important aspect of this stablecoin refers to the fact that it is approved and regulated by the New York Department of Financial Services (NYDFS). That means that the cryptocurrency is subjected to monthly audits and stringent regulatory standards to ensure the security and safety of user assets.

The regulation aids in making sure that each BUSD token is backed with U.S. dollars in a 1:1 ratio. The auditing part makes BUSD interesting for investors and crypto users that need an additional dose of confidence.

A brief history of Binance USD (BUSD)

Paxos and Binance partnered up in 2019 to create a cryptocurrency backed by the US dollar. That is how we got the Binance USD stablecoin. From 2019 till now, BUSD has been performing well in the cryptocurrency world and positioned itself as a high-ranked stablecoin.  

Before launching BUSD, Paxos, a fintech company regulated by the New York State Department of Financial Services, created one of the first digital assets to be regulated by a U.S. state. The stablecoin's name was PAX and it was also backed by the U.S. dollar.

While Binance is the world's largest cryptocurrency exchange by trading volume, Paxos is a regulated blockchain infrastructure platform.

In its short existence, BUSD became one of the fastest-growing cryptocurrencies. In March 2020, BUSD already had a market cap of $100 million. Given that the project officially launched in September 2019, this is quite impressive. However, BUSD continued to climb the staircase to success – at the beginning of 2021, it reached a market cap of $1 billion, 

In 20 upcoming months, the stablecoin grew 20 times over and obtained a market capitalization of $20 billion. BUSD continued to spread across centralised and decentralised exchanges, crypto wallets, and blockchains. 

Currently, Binance USD is widely considered to be one of the most popular crypto assets. The BUSD token is used by millions of users worldwide and has become a staple in the cryptocurrency industry.

Binance after the Terra collapse

While stablecoins sound like a safe investment or at least safer than most currencies on the crypto market, they had their share of affairs. The lower risk didn't always mean that everybody played by the rules.

The collapse of TerraUSD wiped billions of dollars off the crypto market and produced a new ‘2008’ crisis in the world of cryptocurrency. Moreover, it raised serious questions about how stable stablecoins actually are. 

If you want to find out more about regulatory developments after the Terra collapse, check out this article: ‘Stablecoins and Regulatory Developments Post Terra’. 

Binance was sued a while after the Terra collapse by a U.S. investor alleging the crypto exchange falsely marketed Terra USD as a safe asset and fiat-backed cryptocurrency just before the whole collapse took place.  

Back in 2020, Binance was accused in a separate lawsuit by a number of investors of selling unregistered tokens and failing to register as an exchange or broker-dealer but a federal judge in Manhattan dismissed the case. 

To sum it up, the whole Terra collapse plagued the whole crypto world but looking at the BUSD success story, Terra-related lawsuits didn’t affect it.

Binance USD had its own affair...

In February 2023, the authorities knocked on Paxos’ door and ordered the company to stop issuing the BUSD stablecoin. Remember that Paxos and Binance created Binance USD in a joint effort? 

Paxos announced back then that it had been instructed by the New York State Department of Financial Services (NYDFS) to stop issuing the Binance-branded stablecoin. The company agreed to stop issuing new BUSD tokens and claimed that the ones already circulating are firmly backed by the U.S. dollar reserves on a 1:1 basis. 

There were no details why the authorities ordered Paxos to stop issuing the stablecoin. Paxos added that it will end its business relationship with Binance. 

The Binance USD stablecoin got into a real mess; suddenly, it faced the possibility of disappearing. Despite Paxos’ assurances that all tokens were backed up by fiat reserves and that they issued each time a monthly audited report of reserves, BUSD fell off its $1 peg. In fact, it hit $0.995 immediately after Paxos’ announcement. 

On the other hand, BUSD recovered at the speed of light. According to BUSD's creators, the stablecoin is backed by reserves held in either or both fiat cash in dedicated omnibus accounts at insured U.S. banks and/or U.S. treasury bills, including the use of repurchase agreements and money market funds.

Seems like a severe setback triggered a quick comeback. Maybe behind the comeback stands the fact that Binance USD is mainly regulatory compliant or something else, but the fact is that investors didn’t lose their faith.

How does Binance USD work?

As stated a few times before, Paxos and Binance teamed up to create Binance USD. Paxos assumed the role of a cryptocurrency custodian and is responsible for holding the fiat reserves that are used to back up BUSD tokens. On the other hand, Binance manages the BUSD token. For example, it lists the token on their exchanges and provides customer support. 

The technology and mechanism behind BUSD is a simple one when compared to some other stablecoins. BUSD uses a deflationary mechanism that makes sure that the supply and reserve of BUSD tokens and U.S. dollars are constantly kept at a 1:1 ratio. In simple terms, it ensures that each BUSH is always exchangeable for 1 U.S. dollar. 

With the use of smart contract technology, Binance is able to mint and burn BUSD tokens according to its needs. When Paxos deposits U.S. dollars into the reserve, new BUSD tokens can be minted. Minted tokens are sent to the user’s wallet. 

The opposite of minting is burning. When a BUSD token is sent to Paxos, the blockchain infrastructure platform burns the token and provides the user with a fiat equivalent. 

Due to the token’s ERC-20 and BEP-2 compatibility, BUSD tokens can be used on both blockchains. If a user wants to move their tokens from one blockchain to another, they just have to convert it using Binance’s Convert function. 

The Binance Convert feature refers to a special trait that enables users to smoothly transfer their digital assets between divergent blockchains and amounts to Binance USD being a quite versatile stablecoin. Binance assumes the role of a bridge between the two chains. 

Binance USD's current state

BUSD has been developing over time. Some of the latest innovations include implementations of an on-site and offline payment system and settlement options for business. 

It teamed up with a number of other companies such as Moonpay, BitPay, Simplex, and Alchemy to further improve. Additionally, Binance released the Binance NFT project that supports the use of BUSD tokens for non-fungible tokens (NFTs). 

Binance USD price, total supply, and market capitalization

At the time of writing in June 2023, the price of BUSD very nearly equals $1, as it should. BUSD has a maximum supply of 18.4 billion, of which 18 billion are currently in circulation. 

The current market cap equals $5.1 billion with a 24-hour trading volume of $2.91 billion. Notably, the stablecoin is held in approximately 4 million crypto wallets.

BUSD use cases

Due to the unstable crypto market, crypto holders may experience volatile changes in their portfolio value over time. This is the first use case of BUSD – the fiat-backed stablecoin is used to hedge against crypto price fluctuations. Since it is subjected to strict financial regulations, it is considered to be one of the most trusted stablecoins. 

Conducting digital payments using BUSD means that both the sender and the recipient are protected from price volatility. Aside from digital payments, the cryptocurrency is used in liquidity provision and yield farming as well. 

Being present on many exchange platforms and crypto wallet types, the amount of users has grown exponentially. Many new real-world use cases are appearing. For example, particular hotels provide their guests with the chance to book a room using a QR code that allows users to pay with BUSD.

How to buy BUSD?

If you plan to buy Binance and you are already familiar with using crypto, then this is going to be easy for you. If not, take a quick look at our ‘How to use crypto: Sending & Receiving Crypto’.

Let’s explain a few basic steps on how to become a BUSD holder.

1. Choose an exchange and create an account 

Logically, creating an account acts as a gateway to buying crypto. You can make an account directly on the Binance cryptocurrency exchange but you can use any other exchange that supports BUSD.  

Cryptocurrency exchanges provide similar services, but there are some factors you may want to consider such as ease of use, customer support, the range of cryptocurrencies available, fees, and payment methods.

2. Make a deposit

Once your account has been verified, you can make a deposit using a payment method of your choice. Cryptocurrency, card, and bank payments are widely accepted. Check out the trading pairs on the chosen exchange.

3. Buy Binance USD

You can now exchange your deposited funds for BUSD. Exchanges that are easier to use make it quite simple and you just have to enter the amount you want to purchase and click on the ‘buy’ button. 

When you buy BUSD, you can store it in your account on the exchange or store it in your personal crypto wallet.

Is Binance USD (BUSD) a good investment?

Any investment is tricky, especially when it comes to an immature and volatile market such as the cryptocurrency market. You should always do your due diligence and rely on a few golden rules before investing. 

As the name suggests, stablecoins should amount to a safe investment. However, there are many other factors that have to be taken into account. As for BUSD, it is still positioned highly on the market because it is backed by reserves and subjected to frequent audits and strict financial regulations.