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IF Insights: As SEC goes into a crackdown mode, ‘Crypto Winter’ prolongs further

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Binance is the largest crypto exchange and handles billions in investments for investors daily

The year 2022 wasn’t a kind one for the cryptocurrency sector. We had FTX, the market biggie going bankrupt, followed by a few more sector stakeholders winding up their businesses and last but not least, a horrific downfall in bitcoin’s value. All this chaos created a trust deficiency among the investors as well.

Fast forward to June 2023, another such situation is unfolding in the United States, where the Securities and Exchange Commission (SEC) has taken on Binance, accusing the latter of operating a “web of deception.”

What’s the deal here?

Binance is the largest crypto exchange and handles billions in investments for investors daily. The Changpeng Zhao-led venture also sponsored the 2021 Africa Cup of Nations tournament, thereby making its presence stronger on the continent. Binance also has a USD 500 million stake in Twitter.

However, the US SEC, unfazed by Binance’s current market status, has initiated a crackdown on the venture.

SEC has now asked a federal court to issue a restraining order to freeze Binance’s US assets. The crypto exchange has tried to calm down the investors by saying that its user assets in the United States would remain safe and the platform would continue its normal operations.

Countering the SEC’s charges of putting customers at risk by operating as an “unregistered broker, exchange and clearing agency”, Binance has said that would defend itself in court, while calling the SEC’s step an “unwarranted” one.

As per the SEC, Binance artificially inflated its trading volumes, diverted customer funds, failed to restrict American customers from its platform and misled investors about its market surveillance controls.

SEC has also accused Binance and Zhao of secretly controlling customers’ assets, allowing them to commingle and divert customer funds, “as they please”.

A trading firm owned and controlled by Zhao, ‘Sigma Chain’, engaged in so-called wash trading that artificially inflated the trading volume of crypto asset securities on the Binance.US platform.

In 2022 alone, the crypto exchange processed trades worth about USD 65 billion a day with up to 70% of the market. However, as per a Reuters report, the venture also processed at least USD 10 billion in payments for criminals and entities seeking to evade US sanctions.

Also, Binance was earlier accused of commingling its customers’ funds with its corporate revenues in a Silvergate Bank account belonging to trading firm Merit Peak in breach of US financial rules that require client money to be kept separate.

Along with Binance, another crypto firm Coinbase is now feeling the legal heat. The platform is accused of operating illegally since it failed to register as an exchange in the United States.

SEC on a roll

SEC Chairman Gary Gensler is on a mission to assert his jurisdiction over crypto markets, a sector which he reportedly called a “wild West” of investing. The official believes that the sector is undermining both the consumers’ trust and the capital sectors.

On the other hand, crypto companies believe that the industry rules from the SEC are not only unclear, but also give the latter the unfair authority to assert its domination.

However, SEC has found support from ten US states, whose authorities have also accused Coinbase of securities law violations concerning its staking rewards programme.

The SEC also said that Coinbase, since 2019, has made billions of dollars by operating as a middleman on cryptocurrency transactions, while evading disclosure requirements meant to protect investors.

The exchange allegedly traded at least 13 crypto assets. As per reports, these are securities that should have been registered, including tokens such as Solana, Cardano and Polygon.

Coinbase, since its foundation in 2012, has served over 108 million customers and ended March 2023 with USD 130 billion of customer crypto assets and funds on its balance sheet. Transactions generated 75% of its USD 3.15 billion net revenue in 2022. However, the latest allegations have now dampened Coinbase’s success story.

As per SEC, in the staking rewards programme, which has about 3.5 million customers, Coinbase pooled crypto assets and used them to support activity on the blockchain network in exchange for “rewards” it provides for customers after taking a commission for itself. However, the whole functioning, as per authorities, went on in an unregistered manner.

War of words

Jesse Shrader, CEO of the bitcoin start-up Amboss, told Forbes that the United States Congress has failed to keep pace with innovations happening in the cryptocurrency ecosystem, while attacking the SEC chief Gary Gensler for applying outdated legislation through enforcement actions on the largest companies in the global crypto industry.

Kristin Smith, the CEO of the Blockchain Association, told the Cointelegraph that while the SEC’s actions were expected, it’s still unacceptable.

Paolo Ardoino, the Chief Technology Officer of stablecoin issuer Tether, batted for establishing a mechanism where companies’ complaints against the SEC should be listened to.

The industry’s concern is that while the US Congress is trying to frame an effective set of rules for the crypto sector, SEC’s actions are undermining the efforts by circumventing denying public engagement, especially the participation of the crypto players, in terms of giving their feedbacks during the policy formulation process.

However, US Treasury Secretary Janet Yellen has backed the SEC, by stating that there is a need for additional regulations to ensure consumers and investors are protected from the inherent risks present in the crypto industry.

Crypto players exiting the US market

CryptoSlate analysis discovered that the Bitcoin supply in the US has experienced an 11% dip since June 2022.

According to Glassnode, entities operating during Asian trading hours have increased their Bitcoin holdings by 9.9% since June 2022, marking an all-time high. While the US authorities are tightening the noose around the crypto industry, Asia is following a different trend.

Hong Kong’s Securities and Futures Commission (SFC) has reportedly paved the way for a more crypto-friendly environment, signalling the licensing of over eight crypto companies by 2023-end. Entities like CoinEx have started strategically leveraging the pros of these rules. Bitget has already committed to investing USD 100 million to bolster Asia’s Web3 ecosystem.

Glassnode’s data further revealed that while American entities are now holding 11% less Bitcoin than in June 2022, supply held by their Asian counterparts has increased by almost 10% in the same period.

Conclusion

With SEC showing no signs of slowing down its crackdown actions, crypto players have only two options now, either close down their operations or move offshore.

The charges levelled against Binance proves Gensler’s stance on the sector a right one to an extent. However, SEC’s crackdown spree also raises a concern about whether the regulatory body is crossing the line.

As the US Congress scrambles to come out with a set of definitive laws for the crypto sector, SEC and industry stakeholders are on the war path. This doesn’t augur well for the American economy, if one looks at the bigger picture.

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