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Crypto’s Wild Ride: Breaking Down the Sudden Crash & What’s Next

Crypto’s Wild Ride: Breaking Down the Sudden Crash & What’s Next

Discover the catalysts behind the sudden crash, why Bitcoin is faring better, and what's next for the crypto industry after the SEC’s lawsuits.

Cryptocurrencies have become extremely volatile over the past few weeks following the SEC’s lawsuits against Binance and Coinbase. While Bitcoin ($BTC) experienced a rapid rebound from its modest drop in early June, Cardano ($ADA), Solana ($SOL), and other altcoins saw more significant declines and have yet to recover fully.

In this article, we’ll look at the catalysts behind the sudden crash, why Bitcoin is faring better, and what’s next for the crypto industry.

The SEC Spooks Altcoins

The Securities and Exchange Commission (SEC) filed 13 charges against Binance, the world’s largest exchange, and its founder, Changpeng Zhao, on June 5, 2023. Among other things, the SEC alleges that the business permitted U.S. customers to trade on its international exchange and attempted to hide the transactions through wash trades.

The SEC Spooks Altcoins
Solana and other altcoins fell sharply lower following the SEC’s actions against Binance and Coinbase in early June. Source: CoinMarketCap

In addition to these charges, the securities regulator alleges that the company offered unregistered securities for sale, including its exchange token ($BNB) and stablecoin ($BUSD) along with crypto-lending and staking-as-a-service programs. These allegations follow a series of similar allegations against other crypto firms over the past several years.

A day later, the SEC charged Coinbase for operating as an unregistered securities exchange, broker, and clearing agency. In addition, the agency charged the exchange for the unregistered offer and sale of securities in connection with its staking-as-a-service program. The move comes about a month after the exchange received a “Wells Notice” warning it of non-compliance.

While Binance has long been a target of regulators, the move against Coinbase marked a graver concern given the exchange’s attempts to register with the SEC. The lawsuit suggests that the SEC is becoming increasingly aggressive in its efforts to regulate crypto assets as securities and may have little interest in carving out any exceptions.

Cardano, Solana, and many altcoins moved sharply lower following these lawsuits, fearing that the crackdown could expand to more platforms. If the agency is successful in proving these tokens are securities, they could be forced to shut down in the U.S., wiping away trillions of dollars in value and sending crypto valuations sharply lower.

An Exception to the Rule?

The SEC and other regulatory agencies agree that Bitcoin, the world’s largest cryptocurrency, is not a security. In short, it doesn’t meet the definition of a security laid out in the Howey Test, which says securities must be an “investment of money” in a “common enterprise” with the “expectation of profit” that’s “derived from the work of others.”

Since Bitcoin is free of these legal actions, it hasn’t seen the same significant decline as many altcoins. In fact, the world’s largest cryptocurrency has seen an increase in value amid speculation that a spot Bitcoin exchange-traded fund (ETF) may be in the cards, opening the door to more widespread ownership of the asset among retail investors.

An Exception to the Rule?
Bitcoin prices rise sharply amid speculation that a Bitcoin ETF could increase demand for the cryptocurrency among retail investors. Source: CoinMarketCap

Ethereum ($ETH), the second largest cryptocurrency, shares many of the same attributes. While the Ethereum Foundation raised money initially, it has become sufficiently decentralized to avoid the same scrutiny as altcoins. However, the move toward “staking” could jeopardize that status because earning “interest” could make it a security.

Based on its past enforcement actions, Bitcoin and Ethereum are likely the only major exemptions from these rules. The SEC sued Ripple Labs Inc. for raising money by selling the $XRP digital token without registering it as a security. That case is now a major legal battle that could set a precedent when the courts make a final ruling.

What’s Next?

The SEC’s actions could have a significant impact on the crypto markets beyond Ripple, Binance, and Coinbase. If the agency is successful in proving tokens are securities and exchanges must register, the market could become much more regulated and many high-flying projects could come back to the ground in a short period of time.

The good news is that these lawsuits could take months or years to work their way through the legal system. In the meantime, the SEC granted relief to Binance, enabling traders and investors to move their holdings off-platform if they desire. And Coinbase continues to operate as normal until the courts make a final ruling on any registration requirements.

If you trade crypto assets, ZenLedger can help you prepare for tax time to avoid problems with the IRS. The platform automatically aggregates transactions, computes your capital gain or loss, and generates the tax forms you need to file. You can also leverage tax loss harvesting and other tools to avoid overpaying and prove accuracy in the event of an audit.

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Justin Kuepper

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