Price action across the crypto market remains tilted to the downside as investors and businesses digest the consequences of the SEC’s charges against Binance and Coinbase exchanges.
The lawsuits have also affected the decentralized financial (DeFi) markets by reducing total liquidity and most analysts believe that more pain is on the way.
Related: Bitcoin is on a collision course with ‘Net Zero’ promises
SEC goes after centralized exchanges
On June 5 and June 6, the United States Securities and Exchange Commission filed civil lawsuits against two of the largest centralized exchanges in crypto, Binance and Coinbase. The SEC claims that 61 different cryptocurrencies, representing $100 billion in value, are securities.
One of the 61 crypto tokens listed was Algorand (ALGO), a token that in 2019, Gensler called a “great technology” which seems to contradict this latest enforcement action.
Other top crypto tokens specifically mentioned as securities include Binance USD (BUSD), Binance Coin (BNB), Solana (SOL), Cardano (ADA), Polygon (MATIC), Filecoin (FIL), Cosmos (ATOM), The Sandbox (SAND), Decentraland (MANA), Axie Infinity (AXS) and COTI.
The enforcement actions have sent liquidity at Binance.US down by 78% since the lawsuit.
https://t.co/pup2WYms9R market depth is down a whopping 78% since the SEC lawsuit
Market makers vacated instantly, leaving hardly any #liquidity. pic.twitter.com/EvoO778mAy
— Kaiko (@KaikoData) June 12, 2023
In addition to lowered liquidity, Binance exchange saw major balance decreases in stablecoins, BTC and Ether. Stablecoin balances are down over 20% since June 5.
The news has prompted Robinhood to delist three of the tokens the SEC listed as securities. Robinhood has given users until June 26 to withdraw assets or be forcefully liquidated. This means that over $1 billion can potentially be liquidated between the three coins within 2-weeks.
With Robinhood delisting Sol, MATIC and ADA something like ~$1B has to be sold or transferred off by users in the next 2 weeks pic.twitter.com/it4qSHwcGG
— Tom Dunleavy (@dunleavy89) June 10, 2023
The recent SEC action adds to a long history of disputes, misconceptions or mistrust over the actual use case of digital assets. After the FTX implosion, some feel U.S. lawmakers are angry with the crypto industry. The most recent battle is centered on how centralized exchanges can use customer funds.
Bitcoin price falls behind equities
To date, crypto prices are still highly correlated with the Dow and S&P 500 and most major banks still expect the U.S. to experience a sharp recession at some point in 2023. This has not stopped major stock indices from reaching yearly highs after the United States debt ceiling deal.
The SEC crackdown is widening the gap between equities and Bitcoin. Digital asset investment products have witnessed over $88 million in outflows since the complaint.
Digital asset investment products saw outflows totaling $88m, bringing this 8-week run of outflows to $417m. We believe that this is monetary policy related, with currently no clear end in sight to interest rate rises, leaving investors cautious. pic.twitter.com/H1kwVxEM6B
— unfolded. (@cryptounfolded) June 12, 2023
According to U.S. Bank analysis which incorporates more than 1,000 data points, investor sentiment about the current state of the economy remains low.
According to Terry Sandven, Portfolio Manager, Chief Equity Strategist at U.S. Bank,
“The improving performance of small- and mid-sized companies is notable. The small-cap Russell 2000 advanced 4.6% in the first two days of June, nearly twice that of the S&P 500 and NASDAQ Composite.”
Despite the increase in equities, crypto price is not following suit.
TVL and volume remain low
The attack on centralized exchanges has also increased Bitcoin exchange inflow and outflow. Exchange inflows indicate increased sell-side pressure while outflows are typical to self-custody assets.
Despite the netflow movement to on-chain self-custody, DeFi has not witnessed growth. The total value locked metric (TVL) is a common way to examine the health and sentiment of the crypto markets. According to DeFiLlama, TVL across all protocols dropped 0.5% in the past 24-hours and shed $120 billion since April 5, 2022.
Related: Bitcoin and select altcoins show resilience even as the crypto market sell-off continues
With heavy macro headwinds and low volume, it is likely the volatility in crypto will remain for the foreseeable future.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.