SEC sues Binance and Coinbase, 68 altcoins dubbed “securities”, Fed pauses rate hikes

In this week’s news roundup, we break down the top crypto headlines – namely, the legal action taken against the world’s two biggest crypto exchanges by the US securities watchdog and the implications for the wider market. On the macroeconomic front, a pronounced drop in US inflation has finally put an end to rate hikes for the time being – but does the crypto market care?

SEC cracks down on Binance and Coinbase and dubs 68 altcoins “securities”

Last week, the US Securities and Exchange Commission (SEC) launched a two-pronged campaign against the two largest crypto exchanges: Binance and Coinbase . On 5 June 2023, lawmakers charged both firms with violating American securities laws.

The allegations against Binance were particularly serious. In a 136-page document, the securities watchdog charged its founder Changpeng “CZ” Zhao with 13 offenses, alleging that he had been operating a “web of deception”.?

Allegedly, Binance mishandled customer funds and obfuscated the operations of its Binance.US entity. This includes failing to adequately detect and control market manipulation and allowing its US customers to trade on its international platform, which should have been ring fenced. As a result, the SEC has filed an emergency order to freeze Binance.US’s assets and repatriate them to customers.?

Comparatively, the allegations against Coinbase are not as strongly-worded as the charges seen against Binance. The SEC’s gripe with Coinbase is that the exchange has allegedly operated as an “unregistered broker, exchange and clearing agency”, violating US securities law.?

Coinbase’s CEO Brian Armstrong kicked back at the watchdog on Twitter: “Instead of publishing a clear rule book, the SEC has taken a regulation by enforcement approach that is harming America. So if we need to avail ourselves of the courts to get clarity, so be it.”

Outflows from Binance and Coinbase ballooned to $4 billion in the aftermath of the news, with $123.7 million flowing out of Binance’s US arm, according to Nansen. A report from Kaiko reveals that the market depth of 17 tokens listed on Binance.US declined 76% in the week following the allegations.?

In addition to the lawsuits, the securities watchdog also finally made a decision on the classification of crypto assets. At least 68 digital assets, including SOL, ADA, and MATIC have been labeled as “crypto asset securities”, which places them under the regulatory remit of the SEC. The news caused a significant sell-off across altcoins, though BTC and ETH have escaped this classification so far.

Yet even as the US attempts to shut the door on crypto, other jurisdictions are stepping in to take up the mantle. For example, legislators in Hong Kong are welcoming digital asset exchanges with open arms. In a tweet, Legislative Council member Johnny Ng invited “all global virtual asset trading operators, including Coinbase” to apply for a Hong Kong license, hinting at potential stock listing opportunities.?

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While the attack on crypto’s biggest operators is painful in the short term, it isn’t unexpected and both companies were clearly prepared. Both Binance and Coinbase have made clear that they intend to fight their respective lawsuits in the courts, and it’s likely we will witness prolonged battles the likes of which Ripple has been fighting for some years.?

The largest crypto assets – Bitcoin and Ether – shrugged off last week’s events after a short-lived dip, so investors clearly don’t perceive this news as broadly negative for crypto. In particular, the fact that both BTC and ETH escaped the “securities” label is a positive sign.

However, the sell-off across smaller altcoins has persisted following the SEC’s decision that tokens such as ADA, MATIC and SOL should be considered securities. It is less obvious what the long-term impact on these assets will be. In one scenario, Binance and Coinbase could be forced to delist these tokens which will likely make it more difficult for these projects to gain future funding, and onboard developers and users in the US. It is also possible that other global regulators could move towards adopting a similar stance, although this appears unlikely for now.

Longer term, this could drive innovative decentralized projects outside the US, while US traders will have no option but to swap their altcoins for the likes of Bitcoin or USDC. Yet it’s important to keep in mind that simply labeling something a security doesn’t automatically make it a security. Rather, the definition comes down to how a token is offered or traded, or the type of product wrapper it's presented in. In the past, the SEC and CFTC have issued conflicting statements in what some consider a “turf war”, which has contributed to significant uncertainty as to the legal status of cryptocurrencies.?

Yet regulation doesn’t necessarily need to be the villain in crypto’s story. In fact, despite initial concerns over regulatory action in the UAE, UK and South Korea, these markets all have the potential to become future crypto hubs as they develop resilient regulatory frameworks that allow digital wealth platforms to thrive.?

Fed puts rate hikes on pause as inflation plummets to 4%?

Last week was jam-packed with important economic data announcements from the US. On Tuesday, the Bureau of Labor Statistics (BLS) reported the inflation rate for May, which came in at 4%. This marked a significant drop from April’s 4.9% and confirmed that the Federal Reserve's monetary policy is finally paying off.

Energy prices were the biggest contributor on the downside, falling 3.6% in May, with fuel oil seeing a particularly pronounced drop of 7.7%. Utility costs also fell 2.6% during the month. However, food and shelter both continued to see monthly increases of 0.1% and 0.6%, respectively, while used car prices skyrocketed by 4.4%.?

More importantly, however, this news provided the justification for the central bank to halt interest rate hikes for the first time since March 2022. The Federal Funds rate currently sits in the range of 5% - 5.25%.?

Yet Chair Jerome Powell dubbed this move a “skip” rather than an end to interest rate hikes, designed to provide the central bank with breathing room to make more informed policy decisions. The Fed intends to make two more hikes before the end of the year and bring the final Federal Funds rate to 5.5% - 5.75%.

The markets did not welcome the announcement that interest rates will likely continue rising throughout 2023. The S&P 500 dipped on the news, while the dollar rallied. Digital assets also took the news badly – Bitcoin dropped 3.6% to hover around $25,000, while Ether slid 5.3% to $1,651. Most other prominent crypto tokens were also trading around 3%-5% lower.?

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Another bumper week for US data revealed that the US is edging closer to winning the war against inflation. With CPI dropping to 4% from 4.9%, the Federal Reserve finally took some of the pressure off the economy and paused rate hikes for the time being.?

Meanwhile, some analysts suggest this pause may be too little, too late to stop the US economy from hurtling into a recession. Yet while a recession would hit US equities, it’s less certain how crypto markets will respond. Last week, Bitcoin and Ether remained relatively stable, despite the avalanche of news. Following the interest rate announcement, BTC, ETH and many altcoins did dip by around 3%-5%. However, this decline is a rather muted one in the world of digital currencies, where a 20% daily move is not unheard of.

In addition, prior to the FOMC decision, some tokens had a strong week for reasons completely unrelated to US macro news. The likes of ICP, MANA and SAND were on the rise driven by the hype around AI, while DeFi stalwarts Uniswap , Filecoin and Fantom were also trading higher. Unexpectedly, Binance’s BNB also had a strong week, despite the SEC’s lawsuit.?

Even in the face of intense regulatory scrutiny, it seems that the appetite for Bitcoin has not waned. As such, the effect of a US recession on Bitcoin could be similar to that of the banking crisis in early March. In addition, as the SEC doubles down on its efforts to push crypto companies out of the US, crypto may be finally decoupling from the American market.?

In the future, other drivers may have more influence on the prices of digital assets, including local regulations in other jurisdictions, technological developments, and global investment trends. As US investors are increasingly shaken out of the market, leading cryptocurrencies could find new floors and attempt a fresh rally in 2024.

Disclaimer:?

The content of this newsletter does not constitute financial advice and is for informational purposes only. The price of digital assets can go down as well as up, and you may lose all of your capital. Investors should consult a professional advisor before making any investment decisions.