Binance hit by outflows of $947m after news of US lawsuit

New York - The US Securities and Exchange Commission’s (SEC) lawsuit against crypto exchange Binance and its head Zhao Changpeng injects fresh uncertainty into a sector that is struggling to maintain mainstream relevance.

Digital asset prices on Tuesday largely held a drop sparked by the lawsuit.

An index of the top 100 coins has shed about 4 per cent since the complaint hit on Monday.

Bitcoin, the largest token, was last at US$25,797, up 0.2 per cent in Asian trade, pinned near a more than two-month low. It had slumped more than 5 per cent on Monday, the largest daily decline since April 19.

The net outflow from the Binance exchange reached US$702 million (S$947 million) on Monday, the highest since February, according to a Dune Analytics dashboard from exchange-traded products issuer 21Shares.

The SEC accused Binance Holdings and Mr Zhao of mishandling customer funds, misleading investors and regulators, and breaking securities rules.

The action adds to the regulatory heat on the largest digital asset trading platform. It is also another black eye for crypto after a rout in 2022 that contributed to rival FTX’s downfall amid a flurry of fraud allegations.

The market faces an uphill task to restore trust and, meanwhile, investors are moving on to themes like artificial intelligence stocks.

The overall value of digital coins has plunged to US$1.1 trillion from a peak of over US$3 trillion in 2021, when giant stimulus fuelled a pandemic-era boom in tokens such as Bitcoin.

Jane Street Group, Jump Trading and other major trading firms have pulled back from crypto in the United States amid heightened regulatory scrutiny.

The ensuing decrease in liquidity can pose an obstacle for investors by making it harder to get into and out of digital asset investments in an orderly way.

‘Very different’

“The industry will be very different in a year,” Matrixport head of research Markus Thielen wrote in a note.

“Trading volumes will likely drop further and pressure market makers’ revenue projections. Crypto in the US will continue to go through a nuclear winter.”

The SEC in the complaint cited 12 coins as assets that fall under its purview, expanding the list of tokens deemed unregistered securities to span more than US$115 billion worth of crypto.

That implies strict rules should apply, which could make the tokens harder to trade if exchanges shy away from listing them.

Binance called the SEC action “disappointing”, saying it had engaged with the agency in good-faith negotiations to settle the matter and intends to defend its platform “vigorously”.

The exchange faces a web of probes, including a lawsuit by the US Commodity Futures Trading Commission.

Action by the US Department of Justice “against Binance and/or related entities or individuals might not be too far behind”, Bloomberg Intelligence’s senior litigation analyst Elliott Stein wrote in a note.

Boom, bust

For some crypto experts, the sector is merely following an expected, if pronounced, boom and bust cycle.

They point to a 56 per cent rebound in Bitcoin in 2023 as evidence that healing is under way.

“As recently as March, SEC attorneys were publicly saying that Binance was running an unregistered securities exchange, and so we knew this day was coming,” said Ms Noelle Acheson, author of the Crypto Is Macro Now newsletter. “To some extent, we could see some relief that this shoe has finally dropped.”

Outside the US, locations such as Hong Kong and Dubai are seeking to court crypto investment.

The European Union in April approved the most comprehensive digital asset rules of any developed economy.

That potentially gives crypto firms friendlier places to try to recover from a deep retrenchment and learn the lessons of 2022’s crash.

“The lack of US regulatory clarity will drive crypto to other jurisdictions,” said Ms Cici Lu, founder of blockchain adviser Venn Link Partners. BLOOMBERG