Here is a bad way for a stock exchange to work:
- I link my bank account, at Chase Bank, to my stock-exchange account.
- I go to the stock exchange and bid $100 for a share of XYZ stock.
- My bid goes onto the stock exchange’s order book as “100 Chase dollars for XYZ.”
- You come to the exchange and offer to sell XYZ stock at $100 per share, but you demand to be paid from an account at Citibank.
- Your offer goes onto the stock exchange’s order book as “XYZ for 100 Citi dollars.”
- Because my bid is in Chase dollars and your offer is for Citi dollars, our orders are not matched with each other.
- We do not trade.
That is dumb. That is not how the stock exchange works. It could work that way. There are financial markets where your bank is relevant, I guess, and I suppose in the olden days buying stock with a check drawn on a good upstanding bank would be a different trade from buying stock with a check drawn on a faraway wildcat bank. And of course the actual processes of connecting to an exchange and settling trades involve credit evaluations, and if you tried to connect directly to the New York Stock Exchange and post millions of dollars of bids and offers using your account at the Bank of Magic Beans then the NYSE would have questions. And of course if you have Swiss francs and want to buy US stocks, or you have US dollars and want to buy Swiss stocks, you will need to do some converting. But generally speaking the structure of the stock exchange is about trading stocks for dollars. The stocks are all different but the dollars are all the same.
In cryptocurrency markets, broadly, people like to exchange volatile cryptocurrencies (Bitcoin, Ether, etc.) for dollars, but they are particular about what flavor of dollars they want. Some traders will want to send out Bitcoin and get back actual U.S. dollars in their bank accounts. Most professional crypto traders do not, for various ease-of-settlement, staying-in-the-crypto-system and/or regulatory reasons. They prefer to get paid in stablecoins, dollar-denominated tokens that live natively on some crypto blockchain. They will sell you Bitcoin and get back Circle’s USDC or Binance’s BUSD or Tether’s USDT or some other dollar stablecoin.
This creates the annoying practical difficulty that crypto exchanges will list trading pairs like “Bitcoin/USDC” and “Bitcoin/USDT,” and if you want to trade a Bitcoin for dollars you will have to choose which flavor of dollar you want. And the liquidity will be divided: Some people will bid one flavor of dollars for Bitcoin, and other people will bid another flavor of dollars; some people will offer to sell Bitcoin for one flavor of dollars, while others will offer Bitcoin for a different flavor. And the people who bid USDC will not trade with the people who offer for USDT.
And sometimes there is some reason for this: Someone won’t trust Tether, or won’t be able to get USDC, or whatever. Often, though, everyone is more or less indifferent between flavors of dollars; they just want to trade Bitcoin for dollar-ish things or dollar-ish things for Bitcoin. But because there are different flavors of dollar in the crypto world, the liquidity is fragmented.
Binance, the largest crypto exchange by volume, will start converting any existing user balances and new deposits of USD Coin (USDC), Pax Dollar (USDP) and True USD (TUSD) into the company’s own stablecoin, according to a statement published on Monday. The conversion is scheduled to begin Sept. 29.
USDC, issued by Circle Internet Financial, is the second-ranked stablecoin after Tether’s USDT, with a market value of nearly $52 billion, according to data from CoinGecko. Binance’s stablecoin, BUSD, is a distant third at around $19.3 billion.
The exchange said the move is intended “to enhance liquidity and capital-efficiency for users.” Binance will also remove and stop any trading on spot pairs that involve USDC, USDP or TUSD, the exchange said in the statement.
Now most of Binance’s dollar-denominated trading will be for Binance’s flavor of dollars, rather than being for several different flavors. Evgeny Gaevoy tweeted: “Removing most stablecoin pairs is a good thing – liquidity doesn’t have to be split between multiple stablecoins, making market makers’ job easier and markets overall more liquid.” And then if you are a market maker and you get Binance-flavored dollars, you can pretty easily turn them into Coinbase-flavored dollars (USDC) to trade on Coinbase, or various other flavors of dollars to trade elsewhere.
I suppose that if you’re a big crypto market maker you might still have to post, like, Bitcoin/BUSD markets on Binance and Bitcoin/USDC markets on Coinbase — just as stock market makers need to post, like, Tesla/dollar markets on all of the various US stock exchanges. There is still some fragmentation, and each of your markets is in a slightly different currency. Still I guess it is more efficient to have one currency per exchange.