Stablecoin Bridges - SEC, NYDFS & BUSD

OK, some potential clarity to the Paxos/BUSD debacle.

Posted by Markus Thielen, head of research at Matrixport, What Binance-Paxos BUSD issue is really about. Yeah, I know, LinkedIn - urgh!

👇 3) #Paxos had violated its obligation to conduct tailored, periodic risk assessment and due diligence of Binance and Paxos-issued #BUSD customers;

how?

👇 4) #BUSD has issued $11bn on Ethereum but $4.8bn is also accounted for to be issued on BSC, the Binance Smart Chain, in a tokenized version of BUSD called ‘Binance-peg BUSD’ ;

and

👇 6) It appears that #NYDFS is now worried that the $4.8bn might not be properly backed or have had #periodic issues with being 1:1 backed;

Let's stop there. Now, either the NYDFS (and SEC) are deeply retarded, or deeply malicious, or they, yet again, are inventing regulations to suit their racket.

Understanding BUSD and Binance-Peg BUSD

How We Back Binance-Peg BUSD (and Explaining Historical Discrepancies)

and just for fun: Binance USD (BUSD) Transparency Reports

[...] to create a wrapped BUSD token, Binance must first lock a regular BUSD on its native blockchain.

So, BUSD(Binance) is a wrapped version of BUSD(ERC20).

Let's put aside the cascading derivatives of pegging to a peg, and give an analogy of how bridges really work. Coins don't actually "cross" a bridge; all that happens is that a contract is exchanged on both sides.

Imagine you drive a hire-car. Now, imagine you wish to drive across a national land border; you can't take your hire-car, as it is not registered in the other country. So, you park your car at the border, walk across "the bridge", taking with you the original proof-of-hire. On the other side of the border, the same company accepts your document and gives you an identical hire-car, including the permission to drive in that country.

When you wish to make the crossing back, you return the new hire-car, receive back the document for the first country, walk back across the border - and find your hire-car has been stolen! OK, maybe not, but I think this may be what the regulatory morons are playing with.

Notice that, from the POV of you, the driver, it makes no difference whether you can drive across the border or not; you have an identical car with the correct permissions to drive. However, the car hire company must have two cars. Doesn't matter that the first car is "parked" and not being used; just as in the example of theft, there have to be two cars - and therefore double the liability and double the collateral.

That looks like what the regulators are sniffing around, in their customary malicious manner: that coin bridges need to be collateralised on both sides precisely because both sides carry potential liabilities.

Why not just say so?

That's my take.

That Binance shot themselves in the foot by moving around coins into the wrong wallets may warrant a sobering slap in the face, but not the crushing of a whole stablecoin.