Leading cryptocurrencies have taken a hit after US regulators sued exchanges Binance and Coinbase amid a wider crackdown on the industry.
Investors raised about $780 million from Binance and its US subsidiary Binance.US in the 24 hours since the Securities and Exchange Commission launched legal action against the company.
The SEC charged Binance’s billionaire CEO Changpeng Zhao with an alleged “web of deception” and “blatant disregard for federal securities laws.”
Officials have also filed another lawsuit against Exchange Coinbase – accusing it of operating illegally without first registering with the regulator.
The groundbreaking move was a blow to the hearts of the crypto markets. But what does this turmoil mean for the digital currency as a whole?
The SEC sued Binance’s billionaire CEO Changpeng Zhao over an alleged ‘web of deception’
Binance customers netted nearly $780 million in 24 hours after the crypto platform was accused by the SEC of using a ‘web of deception’ to circumvent US laws
What happened after the Binance news?
According to data company Nansen, Binance saw a net outflow of $778.6 million in crypto tokens and Binance.US recorded a net outflow of $13 million in the 24 hours since news of the lawsuit broke.
Despite the exchange repeatedly stating that it has the reserves to handle a flood of withdrawals, the crypto markets were rocked.
The prices seemed to reflect some pessimism about the future of the market – as Binance is by far the largest crypto trading platform in the world.
Bitcoin fell more than five percent following the news, its worst daily drop since mid-April. Despite recovering slightly to trade at $25,772 the next day, it marks a significant drop since last June when it traded at $31,351.
Ethereum was also hit, trading 2.66 percent lower, while Binance’s BNB cryptocurrency fell to a nearly three-month low of $278.20 after the price dropped 9.2 percent following the news.
“It’s another blow to the crypto industry and the crypto exchanges of the world,” Tony Sycamore, market analyst at IG Markets, said of the SEC case.
The markets were rocked by the news about Binance – the largest crypto trading platform in the world
What does it mean for the crypto markets?
Alex Kuptsikevich, an analyst at broker FxPro told from Baron that people should be prepared for the Bitcoin price to fall another 15 percent.
“We have to be prepared for a big sell-off to $22,000,” he said.
The biggest immediate risk is likely that fears about Binance will create a similar run on the bank situation to what preceded the collapse of the FTX exchange founded by Sam Bankman-Fried last year.
The disgraced trader is currently facing several federal charges over the $250 billion stock market collapse.
One of the SEC’s most shocking allegations against Binance was that the company exercises control over the assets held on its platform, “allowing them, in their sole discretion, to mix-up customer assets or divert customer assets, including to any entity that owned by Zhao’.
The alleged mixing of client money between FTX and an affiliated crypto hedge fund called Alameda Research, both of which Bankman-Fried owned, was integral to the stock market’s collapse.
Laith Khalaf, Head of Investment Analysis at UK firm AJ Bell, said it “feels like the crypto bubble has a thousand punctures.”
“Crypto is a highly volatile asset in a lightly regulated market, so investors should be prepared to take on a whole bunch of risk before diving in,” she added. “The golden rule for crypto buyers remains to not invest money that you do not want to lose in its entirety.”
However, some investors see the SEC’s actions as helpful in the long run in aiding regulation in the space — even if the market falls in the short term.
Matt Hougan, chief investment officer at Bitwise Asset Management, a major provider of crypto index funds, said from Baron“Historically, every time regulators stepped in to clean up crypto has ended up being a good thing for the industry.
‘Supervisors have certainly not been perfect. Many of these “clean-ups” came too late and were applied arbitrarily, aimed at punishing rather than protecting investors.
“But the fact remains that the industry has improved over time and these ‘moments of crisis’ have contributed to that. Short-term pain for long-term gain.”
Sam Bankman-Fried is currently facing several federal charges over last year’s $250 billion stock exchange collapse
What can regulation mean in the long term?
The crypto world has been under scrutiny since the collapse of FTX in November 2022.
The SEC has promised to crack down on the industry this year – and the Binance lawsuit is the most significant move yet.
The lawsuit is an attempt to prove that crypto exchanges must register with the SEC and comply with regulations, including investor disclosure and a ban on certain conflicts of interest, according to the Wall Street Journal.
Crypto companies have resisted this, but they could be forced to join or go abroad entirely if the court orders them to comply.
The risk for Binance is if a court decides it is an unlicensed exchange – which could mean that the platform will not be allowed to offer its trading services in the US.
Earlier this year, the company was sued by the US Commodity Futures Trading Commission (CFTC) for running what it said was an “illegal” exchange and a “sham” compliance program.
Zhao said the CFTC claims were an “incomplete recitation of facts.”
Binance said it had cooperated with the SEC’s investigations and “worked hard to answer their questions and address their concerns,” including trying to reach a negotiated settlement. “We intend to vigorously defend our platform,” it added in a blog.