This week, the US Securities and Exchange Commission (SEC) sued two of the biggest crypto exchanges, Binance and Coinbase, for allegedly breaching its rules and trading several crypto assets that it deems securities and, as such, should have been registered.
The lawsuits expand the overall number of cryptos that the SEC has explicitly identified as securities, which puts other exchanges that have also allowed US investors to trade those tokens at risk of regulatory action.
“All US exchanges should now be on notice that they may be subject to enforcement action if they permit, or have permitted, these tokens to be traded,” said Jason Allegrante, chief legal and compliance officer at digital asset infrastructure provider Fireblocks.
Meanwhile, both Coinbase and Binance are disputing the SEC's categorization, saying they have repeatedly called for regulators to create clear rules and that many of these tokens are more like commodities.
While the situation between Coinbase, Binance, and the SEC has just started and is likely to get ugly before a resolution is reached, Ripple is at the forefront of the agency's legal actions, which have dragged on for nearly three years now. A favorable outcome for Ripple can be instrumental in determining the SEC's case against both Coinbase and Binance.
“I don't think that the SEC under this leadership necessarily cares whether they win or lose in the courts. I think what they are engaging in is a coordinated campaign to essentially destroy the crypto economy in the United States,” said Ripple's chief legal officer Stuart Alderoty.
Interestingly, according to analysts at Bernstein, about 90% of crypto trading is already taking place outside the US. It is further expected that exchanges will continue to expand into international regions with more favorable regulations.
Crypto Market Reacts
Amidst this regulatory pressure, the crypto market had a volatile week. However, Bitcoin is showing resilience and holding firm at $26.5k as investors remain largely unstirred by SEC lawsuits.
As of writing, the largest cryptocurrency by market cap is trading at $26,724, down from $27,315 at the beginning of the week before SEC's lawsuit. On Tuesday, BTC took a dive below $26,000 but has since held steady above the threshold.
Investors have actually shifted their attention and are currently looking toward the Federal Reserve's monetary policy decision next week. According to Valkyrie Chief Investment Officer Steven McClurg, the Federal Reserve can suspend its nearly year-long diet of rate hikes due to the ongoing banking crisis.
“It's very prudent that the Fed has decided to stop raising rates at the moment,” said McClurg in an interview on CoinDesk TV's “First Mover” program, “primarily because we do have a banking crisis on our hands right now, and we also have a dollar competence crisis.”
Ether, meanwhile, is changing hands at $1,855, having slipped a bit since Monday when it was trading just above $1,900.
Tokens mentioned in the lawsuits have also rebounded slightly. But some have performed better than others, so which coins recorded the least drop during this ongoing drama? Let's take a look!
CeFi Tokens Weathering the Storm
The lawsuit has hit the centralized finance (CeFi) space, which looks like traditional finance businesses as they have no open-source smart contracts underpinning their operations. Centralized crypto exchanges (CEXs) are part of CeFi, where all crypto trading orders are routed through a central exchange.
Funds on these platforms are housed on the exchange and are exposed to threats if the platform's security procedures fail. They also provide customer support service, which gives customers a sense of security.
Last month, the combined spot and derivatives trading volume on CEXs fell 15.7% to $2.41tn, which was the second consecutive decline in monthly trading volume, according to CCData.
When it comes to spot trading volume on CEXs, it experienced a 21.8% drop to $495bn, marking the lowest monthly trading volume recorded by such platforms since March 2019. Binance's spot market share fell for the 3rd consecutive month to 43% in May from a peak of 57% in February, as the spot volume on the exchange fell 26.0% to $212bn in May.
In the aftermath of the lawsuit, both the CEXs Binance and Coinbase have been recording a rapid outflow of capital. However, while Binance's native exchange token BNB and Coinbase (COIN) shares both dropped by 14.5% this week, many CeFi tokens have managed to weather this storm much better.
Trading at $45.05 at the time of writing, the price of OKB is up 1.5% in the past 24 hours and down only 2% this week. The $2.7 billion market cap token is up 64.32% year-to-date (YTD) and only down about 23% from its $58.66 all-time high (ATH) hit earlier this year in Feb.
OKB is the native exchange token of the trading platform OKEx that gives its holders the advantage of discounts on trading fees and access to the OK Jumpstart initial exchange offering (IEO) platform. The exchange burned 5,497,312.77 OKB (worth over $258 million) between March to May to reduce their supply on the open market.
The token also provides voting rights for tokens to be listed on the exchange. The OKB token is further used to pay transaction fees on OKDEX and the OKChain blockchain.
HTX Token (HT)
This exchange token is down only 4% this week as it changes hands at $2.90 and in the green by 1.8% in the past 24 hours. However, the $469.5 million market cap token is in the red by 43% in 2023 so far and by almost 93% from its $40 peak.
HT is an ecosystem token launched by HTX, which, much like other exchange tokens, offers benefits such as trading fees, margin discounts, and access to certain trading events.
HTX has committed to using 20% of its quarterly revenues to buy back HT and burn them. Justin Sun-owned HTX burned 827,226 HT tokens in Q1, 2023, and almost 300 million tokens have been burned during the lifetime of this program.
Gate Token (GT)
The $573 million market cap crypto is down 4.2% this week but in the green, today by 1.38% to now trade at $4.12. GT's 2023 gains are currently at 36.8%, while it has lost about 68% of its value since its almost $13 peak.
GT is the exchange token of Gate.io that offers benefits like near-instant processing times and zero-commission transactions to traders. It also powers GateChain's ecosystem, where it serves as the PoS staking reward and is used to pay transaction fees.
DeFi Tokens Showing Price Resilience
DeFi, short for “decentralized finance,” is an umbrella term for a variety of financial applications built on the blockchain that are typically built using smart contracts. These platforms allow users to do all kinds of things that they would do in CeFi, such as trade assets, borrow money, and make loans but without intermediaries.
Much like the CeFi space, the DeFi sector is also facing increasing scrutiny from regulators amid US regulators' broader crackdown on the crypto industry. Despite this, the value locked on DeFi applications of tokens alleged as securities in the recent SEC filings remained mostly stable. Moreover, no massive changes have been seen in the number of users or transactions on Solana, Polygon, and BNB Chain.
This suggests positive sentiment among global market participants but even more bullish has been decentralized exchanges (DEX) exploding in volume, as per DeFi Llama. Ethereum-based Uniswap recorded the largest increase in daily volume, while BSC-based PancakeSwap was another DEX that saw a surge in volume following a nearly 20% drop in daily volume since May.
In the current regulatory environment, it makes sense that traders and investors will flee to DeFi protocols. Decentralized lending protocols Aave, along with Curve Finance and Compound, have also seen slight increases in activity.
Up 1% in the past 24 hours, AAVE's price is currently trading at $60.50, representing a drop of 4.7% from the beginning of the week. However, the $873 million market cap token is only up about 16% this year so far and down 90.8% since its $661.69 ATH.
Aave is a non-custodial protocol where users can borrow assets with a stable or variable interest rate and earn interest on their crypto deposits. The platform also enables uncollateralized flash loans, which lets a user borrow assets with no upfront collateral, but borrowed assets must be returned within the same transaction.
Most recently, Polygon-based Lens Protocol, which is Aave's decentralized social-media platform, raised $15 million in funding. IDEO CoLab Ventures led the funding round with entrepreneur Balaji Srinivasan, OpenSea co-founder Alex Atallah, Polygon co-founder Sandeep Nailwal, and Uniswap CEO Hayden Adams joining as angel investors.
BAL took some damage this week as it dropped by over 7% and is in the red by 2% on Friday. The $204.8 million market cap token also recorded 5.58% losses YTD and is down by more than 93% from its $74.45 peak. BAL is the native token of Balancer, a non-custodial liquidity provider, as well as an automated portfolio manager.
Other popular DeFi protocols include DEXs Curve and dYdX, both of which are down by 11% this week, but their price performance over the past 24 hours has started to turn green. CAKE, the native token of Pancakeswap meanwhile, is down 10%. The total market cap of DEX tokens has actually surged by 12.6% in the past 24 hours to now stand at $9.8 billion, as per CoinGecko.
Despite the initial crash in CeFi and DeFi sectors, both are now recovering, with some tokens even holding on better than others. But most importantly, the crypto community has started to come together to fight against the SEC's anti-crypto stance.