Binance USD Delisting and Stablecoin Repercussions: A Local Projections Approach

The delisting of Binance USD (BUSD) marks a critical moment in stablecoin regulation, raising concerns about market concentration and systemic risk in the cryptocurrency ecosystem. While the existing literature examines stablecoins as safe havens and the impact of banking crises on cryptocurrency markets, the implications of regulatory actions on stablecoin market structure remain underexplored. This paper employs local projections, including nonlinear specifications, to investigate the effects of the BUSD delisting on the broader cryptocurrency ecosystem. Our findings reveal that the liquidity displaced from BUSD primarily concentrates in USDT and USDC, reinforcing their dominance and exacerbating systemic risk due to increased market concentration. Furthermore, our analysis uncovers asymmetric effects on traditional cryptocurrencies, with Bitcoin and Ethereum experiencing short-term liquidity contractions, while smaller cryptocurrencies fail to emerge as viable alternatives. Notably, algorithmic and decentralized stablecoins like DAI and FRAX exhibit negligible absorption capacity, reflecting market skepticism toward their stabilization mechanisms during crises. These results suggest a potential unintended consequence of regulatory scrutiny, where increased regulation of major players leads to greater market concentration, potentially creating new systemic vulnerabilities. This highlights the importance of a nuanced approach to stablecoin regulation that considers its impact on market structure and systemic risk within the cryptocurrency ecosystem. Our study contributes to the growing body of literature on cryptocurrency market dynamics and provides valuable insights for policymakers, regulators, and market participants. We call for a balanced regulatory framework that promotes both stability and innovation in the rapidly evolving digital asset landscape.