Published: June 14th, 2023
Liquidity on Binance's US exchange has dropped precipitously since its legal battle with the SEC began last week.
Figures from blockchain data firm Kaiko shows that liquidity cratered by nearly 80% in the seven days since the US Securities and Exchange Commission (SEC) filed its lawsuit against the world’s leading crypto exchange.
On Monday, 5th June, the regulator named Binance and its American affiliate in a lawsuit. The SEC alleges that Binance founder and CEO Changpeng Zhao (CZ) created a ‘web of deceit’ that allowed the exchange to commingle customer funds with its own, something that violates US finance law.
In an analyst note, Kaiko wrote that in the past seven days, ‘crypto traders large and small have fled Binance US. The exchange’s liquidity has fallen by 78 per centas a result.’
Kaiko notes that both Coinbase and Binance proper have also seen a fall in liquidity, but the impact has been much less damaging.
According to the Binance website, Binance US is an independent crypto exchange for US traders. It uses the same Binance logo but operates independently of the corporate mother ship. This supposed independence, however, has also been questioned by the SEC.
Binance isn't the only exchange to feel the watchdog's wrath. Coinbase, America’s largest digital asset exchange, was hit with an SEC lawsuit the day after Binance. The complaint against it is less serious.
Binance US suspended dollar deposits immediately when the SEC filed its lawsuit. Kaiko says that the move to restrict US-denominated fiat volume hit the exchange hard.
It’s been a challenging year for crypto exchanges. The collapse of FTX in November and the subsequent closure of FTX-exposed Silicon Valley Bank precipitated a U.S. banking crisis. American financial regulators have cracked down on the industry as a result, leading to a number of companies closing their doors.
The SEC seems particularly keen to clamp down on crypto companies suspected of dealing in unregistered securities.
The scale and reach of Binance means any disruption to its operations can cascade negatively across the wider crypto market.
In early June, Bitcoin’sprice fell sharply and kicked off an overall plunge in crypto markets after the US Securities and Exchange Commission (SEC) began its enforcement action.
The company, regulators said, had ‘demonstrated utter disregard for American securities law.’ The SEC’s filing says Binance has 'illegally tried to convince US crypto traders to buy, sell, and trade digital assets’ which the SEC says are ‘securities’ under US law.
The agency’s lawsuit alleges that in December 2018, Binance’s Chief Commerical Officer (CCO) admitted the company was running afoul of US securities law.
‘We are running a f***ing unlicensed securities exchange in the USA bruh,” the executive (who’s name has been withheld) replied in an email to Binance’s compliance officer.
In a separate filing also made on 5th June, the SEC added several leading cryptocurrencies, including Solana, Cardano, and Binance’s own Binance Coin (BNB) to the list of securities that fall under its jurisdiction.
In total, the agency said 12 separate tokens being traded on Binance were classed as securities. Crypto market watchers have noted that most of the 12 fetch minimal volumes and depend on Binance for the lion’s share of their liquidity.
In terms of overall trading volume, Binance is a dominant force in global crypto trading. At time of writing, data from CoinGecko showed that more than USD 11 billion in trades had occurred in the 24 hours between Monday 5th June and Tuesday 6th June. That beats the volume achieved by Coinbase, Binance’s nearest competitor, by a factor of 10.
The world's leading crypto exchange has often failed to inspire confidence amongst regulators and even business partners. In May of this year the company announced it would end deposits and withdrawals in Sterling from 22nd May.
An email sent to exchange users on Monday, 13th March said the company’s payments processor Skrill, which provides Binance’s Faster Payments Service in the UK, has backed out of a deal to support GBP transactions.
At time of writing, new Binance accounts were restricted from making GBP deposits, though the company said in its email that current users would still be able to access their GBP balances until the May deadline.
According to Binance, the change affected less than one per cent of Binance customers. But it wasn’t the first time the exchange had difficulties accommodating trades in GBP.
Binance added its first Sterling trading pairs in 2020, ahead of the launch of its UK trading platform. At the time, British citizens could trade Pounds for crypto through the Binance Jersey subsidiary, an entity incorporated in the UK's Channel Islands low-tax jurisdiction.
One year later, Britain’s Financial Conduct Authority (FCA) told the company to cease all 'regulated activities’ in the UK until it received written consent.
Between June 2021 and March 2022, Binance users were blocked from using GBP or EUR to fund their accounts. The exchange found a way around the restrictions by using PaySafe-owned Skrill as its UK fiat partner, and reintroduced Sterling and Euro transactions.
A Skrill representative told Bloomberg that the company has since decided that the UK regulatory environment for cryptocurrency transactions ‘is too challenging at this time’.
‘In an abundance of caution, we've taken a prudent decision to withdraw from the Binance relationship.’
Paysafe, which trades on the New York Stock Exchange (NYSE), reported fourth quarter earnings last week. The company said it had processed more than USD 130 billion in payments in 2022, up seven per cent from the previous year.
In a Reddit Ask Me Anything (AMA) session in early 2022, Binance CEO Changpeng Zhao said traders need to de-risk their crypto portfolios and diversify, ‘though I am not a good example.’