Centralised exchanges are facing the brunt of SEC

Before reading the article, sign up for Cryptogram, a free weekly newsletter on Web3 and crypto.

With its recent lawsuit against Coinbase and Binance, the SEC has opened an assault on the crypto exchange industry with separate accusations on both. Although regulatory oversight is always welcome, the civil suits filed by SEC against Binance.US and Coinbase seem to be going in circles as current regulations don’t really define what central exchanges are supposed to do and what they shouldn’t. 

What is the lawsuit about?

The SEC’s suit alleges that Binance, Binance.US, and its founder CZ offered unregistered securities to the general public in the form of the BNB token, BUSD stablecoin, and a few altcoins. On the other hand, Coinbase received its second lawsuit on Tuesday with SEC alleging that Coinbase traded at least 13 crypto assets that are securities and the company was operating as an unregistered exchange, broker, and clearinghouse. It is pertinent to note that Coinbase is a listed entity in the US.

This comes in addition to lengthy suits already filed in March by US CFTC (Commodities and Futures trading commission) against Binance and a Wells notice by SEC against Coinbase earlier this year.

Let us decode this and see what it means to the global crypto industry in the medium to long term.

1. Confirmation that most altcoins are a security – will ETH be included in future?

Perhaps the greatest takeaway from this lawsuit for investors is the clear classification of top altcoins as a security. Securities require more screening and permissions in the US to be traded. 

Source: US SEC

By classifying BNB, SOL, ADA, MATIC etc. as a security, the SEC has clearly signalled that all altcoins are going to be under the scanner, hereon. Naturally, all of them have dropped in value this week. Given Bitcoin is not classified as a security, only question remains – will Ethereum be considered a commodity or a security? Investors should be prudent from speculating in altcoins till some clarity emerges.

2. Trades have plummeted, customer outflows are increasing

According to CCData, Binance’s market share has been on the decline for three consecutive months and spot trading volume on Binance fell 26.0% to $212 billion in May, recording the lowest spot trading volume on the exchange since November 2020. In fact, overall spot trading volume on centralised exchanges fell 21.8% to $495 billion, recording the lowest monthly spot trading volume since March 2019.

Source: CCData

Since the lawsuits were announced (24 hour timeframe), Binance customers swiftly withdrew approximately $3 billion in assets, while only $1.6 billion was deposited, resulting in a staggering negative net outflow of $1.4 billion. Similarly, Coinbase experienced user withdrawals of approximately $2.2 billion, with only $1.1 billion in deposits. However, the net flow seems to have stabilised and reduced in the following days.

Source: Nansen

3. Institutional investors are panicking

After the lawsuits, the top-three wallets in terms of net withdrawals in the next 24 hours belongs to Cumberland and Brevan Howard Digital, two leading institutional investors. Since April, institutional investors have pulled $329 million from crypto funds according to Coinshare.

This doesn’t augur well in the medium term as top institutional investors supporting crypto are mostly based out of the US. 

4. Widespread regulatory actions are happening across the world

With the recent passage of the Markets in Crypto Assets (MiCA), the European Union is striding forward to bring a regulatory framework to the crypto industry. With focus on centralised crypto services providers, the law aims to curb illicit finance and is expected to go into law in July. The UK wants to be a global crypto hub with their new regulatory regime. It’s possible that Europe is providing a template for the UK and other jurisdictions to follow. 

Meanwhile, the US is falling behind as they fight over politics and existing power structures. Binance.US has suspended many trade pairs and is stopping fiat (USD) deposits and withdrawals by next week.

Source: Twitter (https://twitter.com/BinanceUS/status/1666996908651323393)

If the US market is cordoned off, it may set back the industry for at least a couple of years before another power centre emerges. It will also impact the mining industry which will no longer have the liquidity to sell its rewarded assets.

What can happen now?

If SEC manages to win its suit against either Binance or Coinbase, this could bring clarity around token classification, strengthening investor expectation and protection in the long term. Further, stringent compliance measures could come into effect, which will lead to stronger AML/KYC policies which is a win-win situation for both exchanges and SEC. However, it will come about only after inflicting a lot of pain in the market.

According to Berenberg analyst Mark Palmer, if the suit turns out to be successful, Coinbase could potentially lose 37% of its net revenue. On a long-term basis, this win could lead to market consolidation favouring market compliant projects and companies. 

Key takeaway

At this point in time, the lawsuits appear to hold some valid points and have stirred rumours on delisting tokens from other operating exchanges in the US such as Kraken and Robinhood that are mentioned in the lawsuit. However, this move by the SEC comes at a time when the legal status of many crypto assets remains unclear, with ongoing debates between the SEC and the CFTC. 

With India hosting the G20 summit in September, we can expect some regulatory regimes on crypto assets, as member countries have agreed with India’s proposal for a coordinated global understanding to regulate these digital assets. This is a natural progression for identification and classification of the industry and is a welcome move. However, authorities need to play this soft instead of going hard as investor monies are already being locked in this battle.

Use promocode TNM51 at www.giottus.com/profile#promo after registration to get Rs.51 worth free Bitcoin.

Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.