Is your fund missing out on potential gains?

The Secured Asset Fund for Users (SAFU), an emergency fund established by cryptocurrency exchange Binance to protect user assets, includes Bitcoin (BTC), Tether (USDT), True USD (TUSD), and BNB (BNB). Cryptocurrency included.

However, on April 18, 2024, Binance denominated the entire fund (100% of SAFU assets) in Circle’s USD Coin (USDC).

The timing of this decision may seem odd as the Bitcoin bull market is in full swing due to the recent halving and high Bitcoin exchange traded fund (ETF) trading volume.

During the conversion, Binance exchanged 1.36 million BNB, 16,277 BTC, and holdings from USDT and TUSD to USDC.

Now that 100% of SAFU is essentially pegged to the US dollar through a government-regulated stablecoin, what does this mean for Binance?

SAFU funds lose value in exchange for security.

In July 2018, Binance launched SAFU and raised funds by injecting a small amount of trading fees. On January 29, 2022, SAFU funding reached $1 billion.

The fund’s dollar value fluctuated with cryptocurrency market conditions, weakening during bear markets and then reemerging above $1 billion in April 2024.

Denominating a fund as a stablecoin makes it less sensitive to market fluctuations, but as some market observers have pointed out, it also means missing out on potential gains and exposing it to U.S. dollar inflation.

Tim Draper, billionaire investor and founder of Draper Associates, said in an interview with Cointelegraph that he believes Binance’s decision to revise its fund was “short-sighted.”

He said he believes it would be unwise to allocate 100% of the portfolio to stablecoins pegged to the dollar, adding, “I don’t see a decrease in government spending.”

Latest: Bitcoin L2 Set to Explode as Runes Congests BTC Network

“Governments have little incentive to cut spending when they can print money that people will accept,” he said.

Bitcoin, like gold, is widely considered a safe haven asset. Inflation, money printing, and geopolitical instability are considered ideal conditions for BTC. According to Draper, if Bitcoin rises, SAFU will fall.

“The dollar continues to decline against Bitcoin and we believe the decline will continue and accelerate over time.”

For others, missing out on potential profits may be the price Binance has to pay for safe funds.

Ruslan Lienkha, head of markets at fintech and cryptocurrency exchange YouHodler, agrees with Draper: “In this setup, SAFU funds will lose value due to inflation, but this can be viewed as a payment for safety.”

Lienkha told Cointelegraph that Binance could benefit from USDC’s fully centralized stablecoin setup. Because “it is less exposed to hacker attacks and stolen USDC is much easier to find and block than decentralized Bitcoin.”

He said SAFU “does not have a specific investment target because it is a kind of insurance against emergencies.”

Binance may prioritize security over long-term valuation, but is Binance free to decide, or is it following orders?

Binance may have its hands tied

It may be that Binance did not voluntarily suddenly exchange SAFU funds for USDC.

Binance declined to answer Cointelegraph’s questions about the exact motivation behind its decision. However, Binance’s recent history with US regulators could be an important factor in adopting USDC for SAFU.

“Binance agreed to monitoring by the U.S. Treasury as part of a settlement late last year, so this could definitely have something to do with that,” Grant Gulovsen, a U.S. attorney who works with cryptocurrency clients, told Cointelegraph. “he said.

In 2023, the Commodity Futures Trading Commission (CFTC) sued Binance for violating trading and derivatives regulations.

Related: Here’s why CFTC suing Binance is more important than SEC enforcement:

As a result, Binance founder Changpeng Zhao had to resign and pay a $4.3 billion fine to US authorities.

Another result of this incident was an agreement with the U.S. Department of Justice (DOJ) to broadly monitor Binance operations.

Binance’s petition to the U.S. government also includes five years of oversight by the Financial Crimes Enforcement Network (FinCEN). This is detailed in an X post by former U.S. Securities and Exchange Commission official John Reed Stark.

The change to USDC may be part of a new compliance agreement Binance signed with US authorities.

Why did Binance choose USDC? Stablecoins are widely known within the cryptocurrency community as being the most regulated and compliant stablecoins on the market.

According to Ekaterina Anthony, compliance expert and director of the Crypto Valley Association, “US law enforcement has the same level of authority over Tether, Circle, and Paxos. They can ask anyone to stop providing services to a particular institution if they wish.”

However, she told Cointelegraph: “It may be a little more difficult to track non-US residents than it is to track US residents, meaning it may be easier to ‘catch’ Circle’s directors.” He said.

Binance’s USDC move highlights the importance of regulatory compliance.

The cryptocurrency market has quickly grown from being considered a Wild West market to being recognized by institutional investors with the approval of a US-based spot Bitcoin ETF in January.

In fact, many cryptocurrency market observers expect massive capital inflows in the near future as institutional investors become more comfortable with digital assets.

However, institutional investors demand safer and more regulated markets.

This has created a race among stablecoin issuers to create products that comply with the new regulatory framework.

USDT has dominated the stablecoin sector primarily because it has established itself as the first mover. However, Tether has been surrounded by fear, uncertainty, and doubt due to its opaque approach to the asset backing USDT.

Latest: Changpeng Zhao sentenced to four months in prison longer than expected.

In contrast, USDC has been branded as a highly regulated and compliant stablecoin since its launch in 2018. This allowed USDC to take the lead in institutional adoption over Tether.

Circle has also applied to become a certified stablecoin issuer under the Markets in Crypto Assets (MiCA) Regulations, a new European legal framework.

Binance previously moved the balance of SAFU funds to more regulated assets. In March 2023, the fund reportedly replaced Binance (BUSD) with True USD (TUSD), in response to US enforcement actions against electronic issuer Paxos.

Binance’s move to adopt USDC may have been largely driven by oversight from US authorities. However, the exchange may be making a safe move following the trend in the cryptocurrency industry of demonstrating regulatory compliance to attract the attention of new institutional investors.