The US Securities and Exchange Commission (SEC) has rounded on the cryptocurrency market with lawsuits against Binance and Coinbase, two of the largest and most prominent digital exchanges. Following the news of Binance yesterday, the SEC said it was also suing Coinbase for operating “as an unregistered broker … an unregistered exchange … and an unregistered clearing agency”.
“Coinbase has for years defied the regulatory structures and evaded the disclosure requirements that Congress and the SEC have constructed for the protection of the national securities markets and investors,” the SEC said in its complaint.
Back in March, the SEC issued a Wells notice to Coinbase, warning it had identified potential violations of US securities law, so we kind of knew this was coming.
In March the US Commodity Futures Trading Commission sued Binance for “wilful evasion of US law”. In fact the SEC itself has launched over 30 enforcement actions since last year – it is taking a very assertive approach. Some argue that it has failed to provide a path for digital asset exchanges to register – but it’s absurd to think it is the duty of the SEC to change the rules to suit the crypto crowd.
Unsurprisingly, many in the crypto community are not impressed. Binance founder and chief executive Changpeng Zhao, known as CZ, pointed out that the SEC didn’t sue FTX. The point is that it probably wasn’t a massive priority until FTX blew up and exposed the business model underpinning many if not all these exchanges – comingling of client money and business functions in a way that would not be permitted anywhere else in finance.
Among other things, Binance is accused of mixing “billions of dollars” in customer funds and sending them to a separate company controlled by CZ. According to SEC chief Gary Gensler, the whole industry is “built on non-compliance” with US securities laws.
“All lots of legal stuff – crypto exchanges are clearly all kinda of dodgy in some way or another,” said Neil Wilson, Chief Market Analyst at Finalto. “Tokens are meaningless and have no value IMHO, and they are clearly unregistered securities. Suing the main exchanges does not spell the end of crypto. What Gensler said about the industry as a whole is more interesting. Speaking to CNBC he said we don’t need any more digital currency…This tells you a lot about how the current SEC views the industry: pointless.”
Is the Wild West era coming to an end?
Bitcoin first dropped around 5% or so on the Binance news but then rallied to recover the losses.
“Ultimately, you get the sense that the wild west is being tamed by the SEC with all its railroads and barbed wire,” Wilson added. “This, you would expect, will leave an industry facing higher costs, fewer and more respectable actors and only a handful of coins viable. For now the industry looks shaken – if Binance were to suffer a major exit of client funds (already a lot has been taken out), then it will reverberate around the sector.”
BTC closed last week at about $27,000, a 3.5% decrease from the $28,000 price at the end of last week. It dropped to about $25,500 on Monday after the SEC announced it is suing Binance and Coinbase; trading volumes remain at low levels, with BTC on-chain volume decreasing by 13% during May. The data suggests a difficult moment for the digital asset market in attracting investors and maintaining high trading volumes.
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Why are cryptocurrency trading volumes dropping?
This can be attributed to two main factors. First, the difficult macroeconomic conditions are leading investors to adjust their positions in anticipation of announcements at the next Fed meeting on June 14. While the CME futures market expects with 80% probability that there will be no new rate hike at the next meeting, investors are still cautious as monetary policy expectations have changed rapidly from one day to another.
Second, the recent action being taken by the SEC against Binance and Coinbase has definitely caused a decline in the market, followed by a slight rebound during Tuesday trading hours. But this is a fast-moving situation.
“The actions of the US regulator could push many exchanges outside the country, similar to what has transpired in Canada,” said Matteo Greco, a research analyst with Fineqia International. “It could benefit the Asian market, which is moving toward a friendlier environment for digital assets. As of June 1, the Japanese government lifted a ban on stablecoins and the Hong Kong government legalised the trading of cryptocurrencies by retail investors. Hong Kong asset manager First Digital is introducing a new stablecoin, for example, that will be pegged to the U.S. dollar.”
These moves underlie attempts by Asian regulators to attract new investors in the digital asset market, a shift in attitude to the recent past, especially in China where cryptocurrency trading and bitcoin mining have been restricted
