On the 2nd of January 2023, Data Finnovation went on Twitter to share their concerns on Binance-pegged BUSD. it seems BUSD on BSC was often undercollateralized.
BUSD on BSC was often undercollateralized/unbacked
a dig into the Binance-Peg process and some associated, um, issues
— Data Finnovation (@DataFinnovation) January 2, 2023
Data Finnovation did a deep dive into the Binance-Peg process and some possible issues associated with it.
Binance has a system set up to mint Binance-Peg tokens, which creates tokens on various non-ETH blockchains backed by ERC20 tokens stored on the Ethereum blockchain in a specific wallet.
These tokens can be used to represent a range of assets, including the stablecoin BUSD. However, it has been noted that on multiple occasions, the balance of BUSD in the backing wallet has been lower than the number of BUSD tokens circulating on the Binance Smart Chain. This means that BUSD on the BSC was often not fully collateralized or backed by the tokens in the designated Ethereum wallet.
Currently, it’s good to note that this situation has since been resolved, and the Binance-Peg BUSD is now sufficiently backed.
However, there have been some strange flows of funds associated with this issue being addressed. For example, a large amount of BUSD was withdrawn from and then redeposited on the Ethereum blockchain, and a similar pattern was observed on the BSC.
It is unclear why these transactions took place, but they suggest that unbacked stablecoins were created and later backed with funds from an unknown source. It’s possible there are BUSD tokens on Binance, some of which belong to users, while others might count as backing. This situation is not fully understood yet.
We understand that the system laid out for Binance-pegged tokens was not followed sufficiently to collateralize the tokens fully. And it’s proof that the flow of transactions through the backup wallets has some questions yet to be answered, and it didn’t fully adhere to the process Binance was supposed to follow.
And the proof of all this exists on the Binance Smart chain.
It is also worth noting that the designated Ethereum wallet not only backs BUSD on the BSC but also supports other assets on various blockchains, including the Binance Beacon Chain, Avalanche, Polygon, and TRON.
In short, Binance can print as many BUSD on bsc as they want, without it needing to match BUSD(paxos/eth) supply, because BUSD(eth) is backed by funds held by Paxos, whilst BUSD(bsc) can be backed by whatever Binance think it's appropriate (USD, USDC, USDT, tokens)
— 0xGeeGee (@0xGeeGee) January 2, 2023
In response to Data Finnovation’s analysis, a Twitter user and trader on DefiLlama, @0xGeeGee, pointed out that Binance is allowed to print as much BUSD on BSC as it wants, since unlike BUSD(Paxos/eth), which Paxos backs, BUSD(BSC) can be backed by whatever assets Binance owns. Be it USDT or USDC.