Paxos Chief Austin Campbell ‘Explains’ Why Binance Briefly Pausing USDC Withdrawals Is ‘Normal’

This is my attempt to answer most of them. If you have more after reading it, ask. Feel free to repost this anywhere.

Why did Binance stop USDC withdrawals? Would you believe me if I told you the problem is actually traditional banks and the interactions between stablecoins? It is.

Part 1: Stablecoin Reserve Liquidity During Off Hours To explain this, we have to talk about how a stablecoin works. As a general statement, a properly designed fiat backed stablecoin should take customer money and put that money in safe reserves(1) in the traditional financial system.

The problem is those reserves run on the rails of the traditional financial system. This means if you own treasuries, they settle T+1. If you have overnight reverse repo, that settles T+0. If you own money market funds, they settle T+2 (but often faster, thanks money managers).

And all of those T mean business days, during banking hours (9–5pm, New York time), on days where banks are open (so not weekends and not holidays). Great.

This is normal bank stuff (everyone reading this from tradfi is nodding, and everyone reading this from crypto is puking in their mouth a bit). Now what if someone wants to mint or burn a bunch of stablecoins at 3am NY time on Saturday? Yeah. About that.

As a result, most stablecoin issuers (at least Paxos and Circle that I can personally confirm) keep money at US banks with fast payments networks. These are internal networks that can do 24/7 fast payments, using a private ledger or blockchain. Some of the luminaries in this space who can also bank crypto have historically included Silvergate and Signature.

However, you’d be a crazy person to keep ALL your deposits at a single bank, especially as they get large. You can’t keep $20B in uninsured deposits and be a stablecoin.

Thus, all the stablecoins manage their liquidity and leave some millions to hundreds of millions to billions at these banks, and the rest of the reserves in tradfi instruments. So let us say a stablecoin, we will call it CUSD for Canonical USD as our example, has $10B of assets.

Maybe CUSD keeps $500mm at these fast payments banks, or 5% of total assets. What that means is that CUSD can burn $500mm of the $10B during off hours, but if a $1B redemption comes in at our previous 3am Saturday NY time, you have to wait until NY banking hours to fulfill the remainder of it.

Is there an issue with the assets of CUSD? No. It’s just a timing issue. But this timing issue can break pegs temporarily and is consistently a source of stablecoin FUD because people do not understand how settlement works in traditional financial markets.

The question of is a coin solvent (e.g. are there enough assets) vs. do you have adequate liquidity outside market hours are not the same (and, in fact, probably anti-correlated, because to have that liquidity you take bank credit risk).”

https://crypto-wanderer.medium.com/transparency-among-fud-80f7612fff78#:~:text=Austin%20Campbell,bank%20credit%20risk).