Blockstone Capital Weekly Digest: Saturday 10 June 2023
Updated: Jun 27
The months-long SEC vs crypto battle that has captured international attention escalated wildly this week.
The US securities agency came after the world’s largest (and most scrutinised) exchange Binance hard on Monday with rather alarming allegations of commingling billions of dollars of customer funds, engaging in wash trading, and operating an unregistered securities exchange, among other claims.
But the SEC wasn't done there. The next day, it lodged a lawsuit against Coinbase for running an unregistered securities exchange. In the 24 hours after the SEC announced its suits, traders pulled $1bn+ from both exchanges, which together account for around 70% of digital asset trading volumes.
This liquidity seemingly found its way to decentralised exchanges, with trading volumes on DEXs soaring this week. As per DefiLlama, Between June 5 to June 7, trading volume across the leading DEXs - Uniswap and PancakeSwap leaped by $800m, representing a 444% increase.
While much chaos and debate has ensued as a result of the lawsuits, the initial impact on crypto asset prices was surprisingly relatively minimal, with Bitcoin and Ethereum experiencing minor declines. BTC ended Friday only 1% lower compared to the previous week. Similarly, Ethereum saw a marginal drop of 2.5%.
However, with yesterday’s bombshell news that BinanceUS is suspending USD withdrawals and deposits, Robinhood is dropping support for ADA, SOL and MATIC, and the closure of institutional operations by Crypto.com in the US – crypto assets have dropped sharply. BTC losses have extended to 5.44% for the week, and Ethereum is now down 8.43%.
Cardano Solana and Polygon – the assets delisted by Robinhood – are respectively down more than 30% in the past seven days.
In the coming days, market participants should keep their seat belts fastened for further major events. Tuesday 13 June will see the House Financial Services Committee’s hearing on crypto legislation, the release of inflation data, the FOMC policy meeting with the pause/skip/hike decision, the suspension of USD withdrawals on BinanceUS, and the publication of Hinman’s emails (crucial to the SEC vs. Ripple lawsuit).
But for now, let's dig deeper into the single most debated story of the week.
Carl, Vegard and Yev
Binance, Coinbase lawsuits escalate Gary Gensler’s assault on the crypto market
The SEC's allegations against Binance
In one of the most significant enforcement actions (perhaps ever) against the digital asset industry, the SEC has made extremely concerning accusations of foul play in the 13 charges it filed against Binance.
The lawsuit accuses the exchange of utilising two secret trading firms, Sigma Chain and Merit Peak, both allegedly controlled by CZ, to manipulate prices and trading volume. The agency states that in one instance, at least $190m was transferred from BinanceUS accounts to Sigma Chain. $11m from that account ultimately went towards the purchase of a yacht. CZ took to Twitter to refute this.
The SEC goes on to assert that despite legal requirements to maintain a Chinese wall between Binance and the exchange’s American arm, it believes that CZ and Binance.com maintained control and authority over BinanceUS.
While Binance is no stranger to regulatory troubles and accusations from governments, what makes this particular case a different beast from other complaints is that some of the information provided comes from two former BinanceUS CEOs. Both are unnamed in the lawsuit, but can be identified as Catherine Coley and Brian Brooks. The departures of both Coley and Brooks back in 2021, with Brooks leaving after only three months on the job, raised red flags at the time. Now, it’s added to the unease surrounding the situation.
Since the announcement of the lawsuit, the SEC has sought a temporary restraining order to freeze BinanceUS assets. In response, Binance announced the suspension of all USD deposits as of yesterday, in anticipation of potential cutoffs by its banking partners from US dollar payment rails next week.
All USD withdrawals on the platform will be stopped as soon as next Tuesday 13 June.
Due to the lack of regulatory clarity and escalated tensions with the SEC, many market commentators now predict that Binance will follow in Bittrex’s footsteps and unwind its operations in the US. Amid the current uncertain market conditions, Crypto.com announced today that it is bowing out of servicing institutional clients in the US from June 21.
The SEC's allegations against Coinbase
In its 101-page lawsuit against Coinbase, the SEC alleges that since 2019 the exchange has operated as an unlicensed securities exchange, brokerage and clearing agency. Moreover, the agency alleges that Coinbase has offered and sold unregistered securities via its staking-as-a-service offering, Coinbase Earn.
One aspect of this lawsuit that market commentators have found puzzling (and also somewhat weakens the SEC’s position) is the fact that the agency approved Coinbase’s public listing in 2021.
Following news of the lawsuit, Coinbase's stock price initially dropped near 16% in pre-market trading. However, surprisingly, the stock has since rebounded, experiencing a 3.1% rise on Thursday and an additional 2.71% increase today. Cathie Wood's ARK Invest demonstrated confidence in Coinbase by acquiring 400,000 shares, equivalent to $21m, on Tuesday.
Brian Armstrong, Coinbase's co-founder and CEO, who has long criticised the SEC for its failure to provide clear rules and a compliance path, emphasised that the platform will fight the SEC in court and continue offering its staking service.
In a show of support to Coinbase, Robinhood's Dan Gallagher publicly acknowledged the struggles they faced in registering as a special purpose broker-dealer with the SEC. This echoes Armstrong’s complaints about the lack of a viable registration path for crypto companies with the SEC.
The lawsuits against Coinbase and Binance accuse each exchange of different violations, highlighting several key differences:
Binance faces severe allegations, including the commingling of customer funds, using secret trading firms to support the business, fraud and purchasing an $11m yacht.
Coinbase's violation lies in merging the functions of brokers, exchanges, and clearing agencies, typically separated in securities markets.
Binance CEO CZ plays a prominent role in the SEC's complaint, being referenced nearly 200 times. In contrast, Coinbase's CEO, Brian Armstrong, is mentioned only once in the complaint, suggesting a disparity in their respective levels of direct involvement.
The timing of the lawsuits filed by the SEC, one day apart, suggests a coordinated attack on the crypto market, which is not merely coincidental.
Plenty of words and ink have been spilled explaining that these actions create an environment that alienates blockchain innovators and harm American competitiveness.
The actions of the SEC may also have some intriguing implications, given that the agency lists 13 crypto assets that it considered securities in its lawsuit against Coinbase, and 12 assets that it considered securities in its Binance suit. Among them are the likes of Solana, Cardano, Polygon, BNB, Filecoin and Algorand. That means other exchanges are now having to consider delisting some of the biggest projects by market cap to avoid regulatory risks.
Already, Robinhood has come forth to say it is ending support for Cardano, Polygon and Solana on 27 June, and the market now awaits whether this is the falling domino that triggers other platforms to follow suit.
Moreover, scrutiny has emerged around the motives of Gary Gensler. In a recent appearance on CNBC's "Squawk on the Street," he stated that digital assets are unnecessary because digital money already exists in the form of traditional currencies like the dollar, euro, and yen. Many market participants believe that this statement confirms Gensler's objective is to dismantle the US crypto market rather than genuinely regulate the industry and protect investors. Additionally, Binance's lawyers and CZ claim that Gensler sought to become an advisor to the exchange before assuming his position at the SEC. (As you might imagine, this revelation has triggered quite a response on Crypto Twitter.)
As the legal battles between the SEC and crypto exchange platforms unfold, it is clear that the consequences extend beyond Coinbase and Binance. The near-to-mid-term outlook for the US crypto market appears precarious, and the global industry looks set to face some turbulence. However, both Coinbase and Binance are well-capitalised and prepared to navigate this battle and adapt to any potential changes resulting from the verdict. While the process ahead may be long and costly, our hope at Blockstone Capital is that these events will ultimately lead to regulatory clarity for the US crypto market in the long-term.
Roundup of other key developments
JPMorgan uses blockchain for 24/7 dollar transfers with Indian banks.
CFTC approves Cboe Digital to clear margined digital asset futures.
Swift and Chainlink to test connecting over a dozen financial institutions to blockchain networks.
Circle obtains major payment institution license in Singapore.
Mt. Gox's hackers are two Russian nationals, DOJ alleges in indictment.
Crypto custodian BitGo signals intent to acquire Prime Trust.
Tel Aviv Stock Exchange completes proof of concept to tokenise fiat and bonds.
Circle hires former CFTC, US Treasury executive as chief legal officer.
MetaMask Institutional to integrate with Fireblocks MPC platform.
Crypto.com integrates with CoinRoutes smart-order routing system.
Crypto ads will need to carry risk warnings under new UK rules.
Sam Altman joins investors in $19m round for crypto life insurance startup.
Haun Ventures leads $10m investment in crypto gaming startup Argus Labs.
Tether invests in startup that's building a bitcoin mine in El Salvador.
Atomic Wallet exploited. Losses top $35m.