Why do exchanges like Binance and Huobi want their own stablecoins?

So far, 2019 has been an unsettling year for stablecoins. 

For one, OG stablecoin Tether was found lying about being fully backed by a dollar reserve. Then, amid tether’s legal turbulence, still more stablecoins were issued or announced. After all, what if tether falls? The successors will need to be groomed in time for the king’s overthrow. 

If my memory and counting skills serve, so far this year there have been at least three stablecoins announced by cryptocurrency exchanges. Binance announced last week its own USD-backed stablecoin BUSD, on the heels of its Binance Jersey arm issuing a stablecoin, BGBP, pegged to the British pound. Huobi Global also launched a similar dollar-pegged stablecoin in July with a similar ticker, HUSD (even with the same partner Paxos, which also has a stablecoin, PAX). 

At launch, both Binance and Huobi Global were eager to establish their stablecoins’ regulated status. This is also understandable given that the two exchanges are perhaps eyeing the over $4 billion market tether could leave behind if its legal troubles escalate. However, the more senior contenders in the market such as USDC and PAX may also want to share the same piece of cake. Coinbase and Circle just dropped 2 million USDC in two lending protocols to boost its DeFi presence, while Paxos announced in May the instant redemption of its stablecoin to increase trust and adoption. Per cryptocurrency data platform Nomics, these two stablecoins, along with TUSD, account for over $880 million in volumes, or around 8% of what tether has. In comparison, HUSD has $33 million in volumes at the time of writing, and BUSD... has yet to launch.   

So while Binance and Huobi's dream to replace tether largely hinges on the outcome of the court ruling, immediate gains for BUSD and HUSD could depend on reclaiming tether's stablecoin dominance on the two exchanges. 

Today, USDT still dominates the stablecoin to cryptocurrency trading pairs on both Binance and Huobi. According to Nomics data, the total trading volumes of USDT on Binance is over $394 billion, while for Huobi, the figure is around $186 billion. This effectively means Binance and Huobi’s ability to cash out these stablecoins is at the mercy of how reliable Tether’s dollar reserves are, as opposed to exchanges having direct access to a fiat reserve they control by issuing their own stablecoins

“[Issuing stablecoins] ourselves gives us control because then you know whether the stablecoin has any problems. If we use someone else’s stablecoins… then we cannot control the reserve funds,” Huobi Global head of marketing Ross Zhang told The Block.  

If Binance and Huobi can successfully convert USDT holders to using their own stablecoins, the HUSD and BUSD's combined volumes could reach as high as $580 billion. Money in these stablecoin reserves can then be put into low-risk investments such as saving accounts to generate interest. Given that HUSD right now has around $33 million in volumes, even a 2.25% interest rate would help these exchanges cash in millions. 

And existing customers are essentially what Binance and Huobi were counting on when they launched their own stablecoins - even without being listed on other exchanges, HUSD and BUSD can build liquidity simply by circulating on their own exchanges. 

“Those who can issue this kind of large-scale stablecoins are all big exchanges. Because they have enough customers. Their own users’ trading needs can already support their stablecoins,” said Zhang.

Meanwhile, Zhang noted that stablecoins as the fiat to crypto onramp channel is “critical” to exchanges. For now, exchanges that only list crypto-to-crypto trading pairs can either attract investors who already hold cryptocurrencies or enlist customers through OTC desks like Huobi. Exchange-owned stablecoins give fiat-holding customers who are interested in trading on these exchanges direct access to them, cutting out the fiat to cryptocurrency onramp middlemen such as OTC desks or Coinbase.  

”Stablecoins as an entrance to exchanges are extremely important. Exchanges including Huobi and Binance need onramp channels. For Huobi, we have a fiat to cryptocurrency OTC desk, while Binance, as the biggest cryptocurrency exchange, [does not]” said Zhang. 

For now, tether still has unwavering liquidity despite all the legal challenges. Particularly in China, where Singapore-based Huobi Global and Malta-based Binance draw a large crowd, investors are still driving the USDT volumes upwards. 

“After the government crackdown on cryptocurrency exchanges in 2017, people had no direct venue to purchase cryptocurrencies with RMB and many people started to hold USDT. As a result, there are still a lot of people using USDT today, and it's hard to bypass it when trading,” said Flex Yang, CEO of Chinese cryptocurrency lending platform Babel Finance. 

“Everyone is betting that they are not the last one to hold USDT...  everyone feels that USDT’s long term problems do not conflict with its short term usage, so they use it nevertheless,” Yang added.