What impact will the SEC's continuous lawsuits against Binance and Coinbase have on the cryptocurrency market?

Author: veDAO Research Institute

In recent days, the cryptocurrency world has been tumultuous, with the U.S. Securities and Exchange Commission (SEC) launching regulatory lawsuits against the two major exchanges, Binance and Coinbase. The SEC has requested the court to approve the freezing of Binance.US assets and to issue a restraining order against Binance founder Changpeng Zhao. In fact, one court has already issued a subpoena.

The SEC's continuous actions have caused significant upheaval in the crypto world, leading to a sharp market decline as many investors sought safety by converting mainstream coins into stablecoins. Since the incident, BNB has seen a maximum drop of about 15%, nearing its lowest price in a year. Worse still, unconfirmed reports suggest that the SEC may initiate regulatory lawsuits against another giant—crypto custody platform Robinhood—next week.

Is the SEC's regulation of Binance and Coinbase reasonable? What is its purpose? What impact will such a storm of regulation have on the crypto space? This article will analyze and answer these questions one by one.

Specific Contents of the Regulatory Charges

1. Regulatory Lawsuit Against Binance

• SEC allegations: Binance exchange and Changpeng Zhao are accused of misappropriating customer funds, misleading consumers, and engaging in online fraud, among 13 suspected illegal activities.

• The SEC's complaint includes, but is not limited to, the following 10 tokens as unregistered crypto asset securities: SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, COTI, and claims that BNB and BUSD are Binance's illegally registered assets.

• The SEC also accuses Binance of intentionally evading U.S. oversight.

2. Regulatory Lawsuit Against Coinbase

• SEC allegations: Coinbase is suspected of illegally operating as an unregistered securities exchange since 2019, effectively liquidating investor assets. It also defines cryptocurrencies such as SOL, ADA, MATIC, FIL as securities and accuses Coinbase of offering unregistered securities trading.

• Over a dozen U.S. regulatory agencies have accused Coinbase's staking program of violating state securities laws and imposed a $5 million fine on Coinbase for offering the sale of unregistered securities.

Responses from Binance and Coinbase and the Current Status of Exchanges

Response from Binance and Changpeng Zhao:

1. They first expressed disappointment over the SEC's accusations, stating that they had previously engaged in sincere negotiations and cooperated with the SEC's investigation to address concerns, but the SEC chose to act unilaterally and file a lawsuit.

2. They also stated that Binance is not a U.S. exchange, and the SEC's actions are limited, emphasizing that users' assets are safe and secure.

3. Changpeng Zhao stated that the SEC's series of actions are very damaging to the crypto industry and clarified that the asset freeze order only affects Binance US, while Binance.com is not impacted.

4. Zhao also tweeted that Binance is prepared for deposits and withdrawals and will ensure the stable operation of the exchange's systems.

5. Binance.US announced the removal of over 40 cryptocurrency trading pairs and suspended its over-the-counter trading, but tokens like BNB, SOL, and MATIC were not removed.

Response from Coinbase:

1. Coinbase CEO Brian Armstrong stated that Coinbase continues to operate as usual and there is no risk of customer runs, and the accused staking business will not be abandoned.

2. Chief Legal Officer and General Counsel Paul Grewal responded that the SEC's actions harm companies like Coinbase that have a clear commitment to compliance. He argued that the solution to concerns or regulatory issues is legislation that allows for transparent and fair rule-making, rather than litigation.

Direct Impact on the Market

Stock Prices Plummet, Cryptocurrency Prices Drop

As soon as the SEC's accusations were announced, Binance's stock price plummeted nearly 8%; Coinbase, which is already listed on NASDAQ, saw its stock drop nearly 17% in early trading. On the same day, Bitcoin's price fell below $26,000, the lowest value in nearly three months. Many other smaller coins were also affected, with weekly declines ranging from 5% to 25%.

Confidence Shaken, Assets Flow Out

Due to the SEC's sudden regulatory accusations, and the fact that both Binance and Coinbase are crucial platforms in the crypto space, the shadow of last year's FTX collapse has made investors extremely sensitive to risk. The SEC's accusation mentioned freezing BinanceUS funds and directly named the top ten mainstream coins, inevitably prompting some users to sell off and convert to stablecoins like USDC and USDT. According to data, on June 6 and 7, there was a slight increase in on-chain DEX trading volume, indicating that investors were withdrawing assets to avoid risk after the market turbulence, halting mining and staking activities, and maintaining a temporary wait-and-see stance.

Media Support, Criticism of the SEC

Many foreign media outlets and industry influencers have come out in support of Binance and Coinbase, expressing their trust and confidence in them. The market uproar and price fluctuations have caused dissatisfaction among many, with foreign media Blockworks directly criticizing SEC Chairman Gary Gensler, arguing that he is undermining the interests of the nation and its people, and that he lacks the capability to regulate cryptocurrencies, instead adopting aggressive policies that stifle innovation. Influential media believe that digital assets are an inevitable trend, and if the SEC continues with such a regulatory approach of "I suspect you are involved, I will accuse you, but I do not yet have direct evidence," it will drive the Web3 revolution out of the United States.

Anxiety Spreads, Who's Next?

The SEC first submitted a 136-page lawsuit against Binance and Changpeng Zhao in a U.S. federal court, and just as everyone was focused on this, it turned its attention to Coinbase. The consecutive accusations over two days, with similar reasoning, have left other crypto platforms anxious. For example, on June 7, the cryptocurrency exchange Robinhood announced that it might delist cryptocurrencies deemed securities in the SEC's lawsuits against Binance and Coinbase. Although the platform has a brokerage license for securities trading, Robinhood believes that other safe investments in these projects lack disclosure standards, preventing them from being relisted.

Analysis of Reasons

First, following the FTX incident, there has been an increased demand for regulation of centralized exchanges, and the SEC wants to expand its authority and establish its credibility in cryptocurrency regulation. In fact, the allegations clearly indicate that the SEC has accurately identified the gray area of "designating certain cryptocurrencies as unregistered securities," and the more than ten tokens explicitly mentioned are all among the leading mainstream coins. It is evident that after the FTX incident, the SEC is determined to regulate and has conducted extensive research in this area.

From a positive perspective, reasonable regulatory policies are certainly beneficial for investors and platform users, as they standardize the behavior of exchanges, protect fund safety, and mitigate the impact of incidents like FTX's collapse on the financial industry. Therefore, there needs to be the most authoritative and professional regulatory body, and the SEC aims to play this role, gaining greater authority in the crypto world.

Furthermore, both Binance and Coinbase's responses mentioned "previous cooperation in investigations and negotiations," and the $5 million fine imposed on Coinbase indicates that the SEC is looking to collect substantial penalties. From last year's bear market to the current market, which has not yet shaken off its sluggish sentiment, Binance, as a centralized exchange, has seen its revenue grow tenfold over the past two years, reaching $12 billion in 2022, while Coinbase not only went public but also has annual revenues in the billions. For such large platforms, the SEC is likely to impose astonishing fines, which would both demonstrate regulatory strength and authority, laying the groundwork for more regulatory measures in the future, and also represent a significant direct income.

Another reason that raises suspicion is the suppression of the Binance brand. After the FTX collapse, there has been no local competitor in the U.S. that can rival Binance, and a large amount of assets are stored in non-local exchanges, which is indeed unsettling for the U.S. Although the SEC has also filed regulatory lawsuits against the local platform Coinbase, many have commented that "the treatment of the favored child is lighter" compared to the 136-page lawsuit against Binance.

Possible Long-term Impacts

1. The arrival of a bull market is delayed, market vitality decreases, and market sensitivity and confidence decline. After experiencing a bear market in 2022, the overall market showed signs of recovery in the first half of 2023, with several small waves of enthusiasm such as BRC20, meme coins, and new blockchain launches, seemingly indicating improvement and increased investor confidence. However, the regulatory crackdown on exchange giants has reminded everyone of the nightmare of FTX, leading the market back to a risk-averse and conservative investment trend.

2. If the SEC's regulatory lawsuits can successfully conclude in various respects, it is not difficult to infer that future regulations on the crypto world will gradually arrive. There will be reasonable regulations on platform behavior, stricter fund oversight, and better protection for users' assets.

3. While regulation is strict, it may, to some extent, limit the flow of capital and reduce capital utilization, which could stifle active innovation in project agreements. It is foreseeable that there will be less funding flowing into new projects and fewer innovative models receiving compliance approval, which will reduce the vitality of the crypto space.

4. If the SEC's future regulation is too harsh, it could further strike at the U.S. web3 industry. The content of this lawsuit clearly falls within the gray area of crypto platforms, which has been a matter that regulatory agencies could choose to oversee or not in recent years. However, the SEC's sudden refusal to resolve negotiations privately and instead publicly accuse based on "suspicions" has caused great concern among major projects. For large platforms like Binance and Coinbase, they may be able to accept fines and adjustments, but for other web3 startups in the U.S., they may not withstand such a blow.

5. In response to the SEC's accusations, one of Zhao Changpeng's tweets stated that we must unite. Although the target is not explicitly indicated, it should refer to everyone in the cryptocurrency community, every member. CZ also expressed that the SEC's actions are a serious blow to the crypto industry, and he aims to call for everyone to unite and have confidence in the crypto space. From the data, Binance has also seen a return of assets after initially being accused, with many influential figures depositing capital, restoring to previous levels. Guiding the confidence of Binance and CZ will undoubtedly help build market confidence and foster greater unity in the crypto community.

Conclusion

Based on the intensity of the SEC's statements on Twitter, it can be inferred that this regulatory battle will not end simply and may even intensify. We can expect that its duration will not be short, its scope will not be small, and turmoil will continue. We hope that all investors will pay close attention to news in the crypto space in the near future and continue to follow the developments of the SEC's regulatory battle with veDAO. At the same time, we also urge everyone to manage their risk tolerance and invest cautiously.