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The Inside Story of Huobi's Heco-Peg Tokens

With recent upheaval at Huobi in the news, and fresh questions about how Binance's Binance-Peg mechanism really works, it is worth digging into Huobi's equivalent: Heco-Peg assets on Huobi Eco Chain.

About 6 months ago, we noted some odd behaviours around Huobi's HUSD stablecoin and its relationship with stablecoin service provider Paxos. With recent upheaval at Huobi in the news, and fresh questions about how Binance's Binance-Peg mechanism really works, it is worth digging into Huobi's equivalent: Heco-Peg assets on Huobi Eco Chain.

Related: 2 Fast 2 Furious: Stablecoin Edition

Huobi launched its Eco Chain in December 2020. In short order, they began offering Heco-Peg tokens with the following characteristics:

  1. They are not eligible for cross-chain transfers
  2. Deposits and withdrawals are via the HECO chain within Huobi

This sort of language is present in many announcements. As a result it looks as though the Huobi Eco Chain is simply another guise for the exchange itself. Users may transact peer-to-peer on HECO but the underlying tokens are all custodied at Huobi. That is a weird sort of flavour of DEX. It's as if some company called "Uniswap Exchange" custodied all LPs funds and the smart contracts simply switched the ownership records around.

There is a surely a trusted party here. And that party controls all the funds.

The Paxos Relationship

We previously noted oddness in the minting and burning of Paxos-related stablecoins in the past. About Paxos' own USDP we wrote:

What kind of stablecoin routinely burns >5% of the supply in a single day?
In 2020, USDP minted and burned over US$1.25 billion in tokens on a market cap nearer US$250 million.
What is a stablecoin that serves more as a conduit for, rather than a store of, value? That’s a new use case.

And as it turns out Huobi's HUSD on Huobi's own chain exhibits this sort of behaviour to an ever greater degree.

Daily on-chain volume for HecoPeg HUSD. The vertical bar is the date Paxos announced the end of the HUSD relationship.
Daily on-chain transfer count for HecoPeg HUSD. Again the vertical bar is the date the Paxos relationship ending was announced.

In these charts we can see that whatever was happening with HecoPeg HUSD it slowed down dramatically when Paxos' involvement ended. But how can we tell what was happening? Well, borrowing from previous stablecoin discussions, we can look at the relative volume of minting and burning during this period on the Huobi Eco Chain.

The daily average minting and burning was in the US$10 million to US$20 million range. On a market cap generally in the US$200 million to US$500 million range:

That is a pretty high velocity of minting and burning. And it dropped off dramatically when the Paxos relationship ended.

Banking Oddities

This raises some obvious questions. First, was Paxos aware Huobi was running a parallel version of the HUSD stablecoin on a centralized network without any of the compliance controls required by the NYDFS? If so did this play in to their decision to end the relationship?

If Paxos had no idea that raises a completely different set of questions. Clearly the NY regulators have no interest in offering a sort of sleight-of-hand faux regulation scheme for companies where it is easy to misrepresent what is (native HUSD) and is not (HecoPeg HUSD) regulated in ways that are difficult for consumers to understand. Tighter rules here are surely required. A spokesperson for Paxos did not reply to these questions before running the piece. We will update if we hear back.

And it goes deeper. We are talking about activity on the Huobi Eco Chain which may or may not connect to the fiat banking world. But, as we previously reported, the velocity of minting and burning of the regulated Paxos coins – which is 100% tied to real USD transfers – was also elevated during the time these two companies had a relationship. To the extent those transfers are tied to transfers of unregulated stablecoins on a second blockchain that raises serious questions around the adequacy of the underlying banking regulations. If, for example, Huobi Eco Chain transfers can move fiat among trust accounts which do not face full banking KYC/AML it is easy to see how loopholes may emerge.

The NY regulators have zero interest in enabling offshore exchanges to construct infrastructure for directing USD payments to parties that would not otherwise be able to get such banking. NYDFS regulated stablecoins were supposed to close loopholes not open them!

Paxos has not responded to Blockhead requests for comments.