A regulatory Big Bang is sweeping cryptocurrency exchanges. In the space of 48 hours, the US Securities and Exchange Commission has set its sights on two of the biggest players in the industry.
On Monday, it accused Binance, the world’s largest crypto exchange, and founder Changpeng Zhao of committing some of the same crimes that led to the collapse of Sam Bankman-Fried’s FTX. The SEC alleged that Binance had diverted client funds and used covert trading firms to bolster trading volumes.
A day later, the regulator sued Coinbase, the largest US crypto platform, for allegedly operating as an unregistered broker and trading in unregistered securities.
Cynics would say the SEC closes the barn door after the horse jumped. Cryptocurrency fraud has led to $1 billion in losses, according to a Federal Trade Commission report last year. And that was before the collapse of FTX.
In addition, the SEC approved Coinbase to go public with a direct listing in 2021. Why did it let the company sell stock to the public if it is an illegal, unregistered stock exchange?
Both Binance and Coinbase will contest the lawsuits. The outcome will not matter. The damage has been done. Crypto investors have pulled nearly $800 million out of Binance since the SEC announced its charges, according to research firm Nansen. Coinbase lost more than a fifth of its market value this week.
Cryptocurrency trading volumes on the two exchanges were already declining. The SEC will add to the downward pressure by expanding the list of tokens it deems unregistered securities in its complaints. Mizuho, a bank, estimates that more than 30 percent of Coinbase’s revenue could be at risk. So-called “alt-coins” — tokens less well-known than bitcoin or ethereum — accounted for half of Coinbase’s trading volume and transaction revenue last year.
The SEC’s case against Binance shakes confidence in some exchanges. It can accelerate a shift to using alternative peer-to-peer exchanges. But the crypto winter turns into an ice age.
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