Binance admits its stablecoin sometimes lost the full backing it needed to keep its price fixed at $1
- Binance said its BUSD-linked stablecoin hasn't always had the dollar backing needed for its price to stay fixed.
- The peg for the listed crypto token wore thin due to a "timing mismatch", the exchange said Tuesday.
Crypto giant Binance has admitted that it hasn't always maintained the reserves needed to keep the price of its BUSD-linked stablecoin fixed at $1, creating a shortfall of as much as $1 billion in backing for the token.
Stablecoins are cryptocurrencies that derive their value from an asset like the US dollar or gold, which are less volatile in price than digital assets. That cushions investors against wild swings in the wider crypto market.
The mechanism that is supposed to keep Binance-peg BUSD's price stable had sometimes worn thin in the past, the world's biggest crypto exchange said Tuesday. The rhythm of managing the token meant it wasn't always fully "pegged" to the dollar, it said.
"Binance has always rebalanced or updated the assets in the pegged addresses periodically, not in real time. We now rebalance much more frequently to ensure it's always 1:1 backed," it said in a blog post.
The exchange keeps the token's market price at $1 by holding reserves of BUSD, which is equivalent to the dollar. BUSD is a separate stablecoin with Binance branding that is issued and managed by regulated blockchain company Paxos Trust.
"For operational reasons, on occasion in the past, there was a timing mismatch in backing Binance-peg BUSD with BUSD," it said. "From the data it is clear that the rebalancing did not always keep pace with the demand for Binance-peg BUSD."
"Having identified this ourselves last year, we now rebalance more frequently to ensure that Binance-peg BUSD is transparently fully backed."
The gap between the reserves held by Binance and the amount of BUSD circulating on the exchange topped $1 billion three separate times between 2020 and 2021, according to ChainArgos data first reported by Bloomberg.
BUSD is the third-largest stablecoin by market capitalization with a total value of $16.4 billion, according to CoinMarketCap.
Stablecoin issuer Terra's inability to keep the price of its token fixed at $1 was one story that fueled to the brutal crypto selloff of 2022.
Terra pegged UST's price to $1 using an algorithm, but heavy selling on May 7 broke that mechanism. The stablecoin's value plunged below 10 cents in the space of days.
The double death spiral of UST and its sister token luna wiped out over $20 billion in value in seven days. That's the second-highest amount lost by crypto investors in a single week last year, according to Chainalysis data.