Activity of US crypto exchanges, liquidity plummets in the wake of SEC lawsuits

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(Kitco News) – The cryptocurrency market had a strong start to 2023, with Bitcoin’s price rising 90% to hit $31,165 on April 14. But in the second half of the second quarter, it cooled significantly due to enforcement action by the Securities and Exchange Commission (SEC) and concerns about the health of broader financial markets.

Robinhood, the popular US brokerage service that also provides access to cryptocurrencies, released its May Operating Data report on Monday, showing that the volume of crypto trading on the platform fell 43% in May compared to April.

This decline in total volume came despite volumes for both equity and options contracts having increased since April, with gains of 27% and 29% respectively.

Year-over-year, the difference was even more drastic, with total traded volume in May 2023 at $2.1 billion, down from $6.6 billion in May 2022, which also happened to be the same month in which Terra/Luna collapsed and the first contagion event of the year.

Robinhood’s data also shows a decrease in the number of monthly active users (MAU). The platform recorded a total of 10.6 million MAUs in May, up from 11.5 million in April and 14.6 MAU in May 2022.

Last week, the brokerage firm announced it would end support for Cardano (ADA), Polygon (MATIC), and Solana (SOL) as a result of them being identified as securities in the lawsuits filed by the SEC against Binance and Coinbase. These are three of the most popular altcoins and the move could result in even lower crypto trading volume on Robinhood.

The decline in volume and active users of the popular fintech app highlights the decline in the crypto asset class’ involvement in recent months as US regulators ramp up efforts to scrutinize digital asset service providers .

June also saw a drop in liquidity and activity on the Binance.US exchange due to the SEC accusing the platform of multiple securities violations.

According to a report from Kaiko, liquidity on Binance.US, as measured by aggregate market depth for 17 tokens, fell 76% in the week following the SEC lawsuit, from $34 million to $7 million.

Change in market depth on Binance.US. Source: Kaiko

Due to the exodus of market makers, the exchange has seen its market share in the US drop from 20% in April to 4.8%.

The two largest cryptocurrency exchanges in the world, Coinbase and Binance (global), have also experienced market depth declines since the lawsuits. “Coinbase liquidity is down ~16%, while Binance is down ~7% since early June,” Kaiko data shows. “Binance’s market depth initially remained stable and even increased in the immediate aftermath of the lawsuit, but fell over the weekend as the altcoin markets sold off.”

“The sharp decline in liquidity suggests that market makers are nervous and want to avoid volatility-induced losses and the non-negligible possibility that their assets could be caught in an FTX-style stock market collapse,” Kaiko said.

Despite the drop in liquidity for Coinbase, the exchange’s share of the U.S. market rose from 46% to 64% over the past week, Kaiko noted, but could not pinpoint a specific reason for the increase.

Kaiko said that in the long run, the SEC’s enforcement action is likely to lead to the establishment of a regulatory framework for cryptocurrencies in the US, which will ultimately benefit the asset class.

“This week marked a turning point, as the SEC took over two of the world’s largest exchanges,” said Kaiko. “While the solution may take some time, somehow there is regulatory clarity.”