The world's largest crypto exchange, Binance, announced that it will convert stablecoin USDC into its own stablecoin, BUSD. Users will still be able to deposit and withdraw USDC. While the news seems negative for USDC, experts say it doesn't have to: on the contrary.

What will Binance do, exactly? Anyone with a balance in USDC will see it automatically converted to Binance USD (BUSD) on September 29. First, of course, this makes little or no difference to the value of the holdings. After all, these are stablecoins, which are pegged to the dollar if all goes well. The price of one stablecoin relative to another fluctuates a fraction of a percent on an average trading day (barring exceptional market conditions: during the market panic of June 2022, USDT dropped several percent relative to other stablecoins).

About the stablecoin market

Without stablecoins, the crypto market would be in a lot worse shape. Stablecoins grease the crypto exchanges' machinery. Thanks to stablecoins, users who want to for example sell their Ethereum, can store the dollar value on crypto exchanges, in the form of stablecoins. So they don't have to move their dollar capital back and forth between the exchange and a traditional bank account, which is costly and impractical.

USDC is the second largest stablecoin after market leader UDST (Tether). Binance's own stablecoin, BUSD, follows at a respectable distance in terms of total market value: over 50 billion of USDC are in circulation and 19 billion of BUSD.

The impact

While at first glance the news seems bad for USDC and the stablecoin market, it doesn't have to be. Fragmenting the market into all kinds of different stablecoins is not convenient for users: it requires hundreds of trading pairs. For example, the less traded crypto coins do not have a trading pair in USDC but they do have BUSD. In that case, in order to buy that coin, the user must first convert his USDC into BUSD. And that costs transaction fees.

This conversion from USDC to BUSD is what Binance will now do by default. The crypto market on Binance will therefore become more liquid: there will be less friction for traders whose starting point is USDC. Consider that most trading pairs between crypto and stablecoins on Binance are of course with their own stablecoin BUSD.

Conclusion

USDC need not suffer from this news. On second thought this is not about a ban but about making trading between USDC and other crypto frictionless. If the news is negative for a market player, it is likely to be market leader USDT. This will keep existing separately on Binance, but thus will become more of an island, and more of a hassle for traders.