Cryptocurrencies: Impact of the serious SEC allegations
In the still very volatile coin market, regulation dominates sentiment and prices. Trading with Bitcoin and Ethereum is relatively unscathed by this. A situation report.
16 June 2023. FRANKFURT (Frankfurt Stock Exchange). From their annual high reached in mid-April, Bitcoin and Ether have meanwhile also lost 20 percent again. However, other coins such as Cardano or Solana lost half of their value in these two months. Both cryptocurrencies were officially classified as securities by the U.S. Securities and Exchange Commission (SEC) at the beginning of June. Crypto specialists at 21Shares believe that such assets are likely to face stricter market conditions in the future. To some extent, these cryptocurrencies have also already been removed from the range of products offered by brokers.
Binance and Coinbase are being sued
The corresponding list, which includes even more cryptos, was part of a lawsuit filed by the SEC against crypto exchanges Binance and Coinbase. Some of the accusations contained therein are very severe and show how serious the authority is about enforcing strict regulation of the asset class, which is still quite young. However, Eliézer Ndinga, Head of Research at 21Shares, stresses that the two cases are very different: "While Coinbase was accused of offering and selling unregistered securities, Binance had harsher allegations, including fraud and commingling of funds."
One possible consequence of these events could be that crypto followers are increasingly moving their trading activities to other countries. It's a trend that's been evident for months. Since the beginning of the year, bitcoin and Ethereum volume market share in the U.S. has fallen from 85 percent to about 70 percent. In Europe, the so-called Mica (Markets in Crypto-Assets) regulation is set to take effect in 2024/25. In May, leaders had agreed on this EU regulatory framework for crypto assets.
Bitcoin and Ether are not on the SEC list
What may come as a surprise in this news cycle is that bitcoin's 180-day volatility fell to its lowest level in at least two years in early June. Benjamin Dean of WisdomTree explains it as follows: "It's important to note that neither of the SEC's complaints refer to bitcoin as a potential 'crypto security,' reflecting the long-held view that bitcoin is a commodity, not a security." Still, exchange-traded bitcoin products in Europe saw net outflows in May for the first time this year, according to his calculations.
Jan Duisberg, who also trades crypto ETPs for ICF Bank, among others, also points to the significant drop in price fluctuations. In addition, according to his observations, the wheat is slowly but surely separating from the chaff in cryptocurrencies. "The market is in a reinvention phase after the prolonged dry spell," the trader explains. According to the report, investor interest has dropped significantly compared to the hype of a few years ago. Duisberg also sees the movement towards "high-quality assets" observed by 21Shares, albeit with manageable turnover: "Bitcoin and Ether are setting the pace." The 21Shares Ethereum Staking ETP (CH0454664027) is proving to be a perennial favorite. "The ETP is really easy to trade thanks to narrow spreads, even for larger amounts if desired," says the ICF trader. He also observes comparatively regular turnover in ETPs issued by VanEck on Ether (DE000A3GPSP7) and Bitcoin (DE000A28M8D0).
Duisberg
Bitcoin ETNs: Better with collateralization
In the structured products segment, trading in crypto certificates at Vontobel, a bank that is very active in this area, was down slightly in the past four weeks. Accordingly, the number of executed orders fell by a good 14 percent. This mainly affected Ether in the two major cryptocurrencies. For bitcoin, the decline was only just under five percent. In the case of the executed orders, purchases also predominated here. "While in the previous period the ratio between buy and sell transactions was almost balanced, in the current observation period the buy transactions predominated with a share of 70 percent," reports David Hartmann of Vontobel. The most popular structure here was the open-end participation certificate on Bitcoin (DE000VQ63TC1). The open-end participation certificate on Ether (DE000VQ552V2) was also in relatively high demand.
By Thomas Koch, 16. Juni 2023 © Deutsche Börse AG
Selected quotes from SEC Chairman Gary Gensler's June 8 speech on crypto asset regulation:
"Markets are ultimately about trust. For 90 years, that trust has been based on compliance with securities laws... Cryptocurrency markets should not be allowed to undermine the public's well-earned trust in capital markets... Cryptomarkets should not be allowed to harm investors."
"As Gurbir Grewal, the SEC's director of enforcement, said, 'You can't just ignore the rules because you don't like them or because you prefer others.' The consequences for investors are far too great'"
"Binance and Coinbase have commingled securities brokerage functions and unlawfully offered them without registering them with the SEC.... Registration is central to the fundamental protection of the investing public and our markets."
"Crypto intermediaries may need to separate business lines, establish rules to protect against fraud and manipulation, properly segregate customer funds, mitigate conflicts, or change their approach to clearing and custody. These are the things that protect investors. The fact that they have not built their platforms with these things in mind should not be a free pass to put investors at risk."
"Given the widespread violations, it's honestly not surprising that there have been a lot of problems in these markets. We've seen this story before. It is reminiscent of what we had in the 1920s, before the federal securities laws were put in place. Swindlers. Con artists. Con artists. Ponzi schemes. The public is lining up in bankruptcy court."
"In a market where fraud, abuse and non-compliance are commonplace, there are too many to name."
By Thomas Koch, 16 June 2023 © Deutsche Börse AG
About the author
Thomas Koch is a CEFA investment analyst, investment specialist for structured products and certified certificate advisor. Since the beginning of 2006, he has been covering events on the capital markets as a freelance journalist.
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Koch
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