Under Pressure: The SEC Charges Binance and Coinbase

It has been yet another tumultuous week in the regulatory landscape for digital assets, with the US Securities and Exchange Commission (SEC) filing back-to-back legal charges against the two largest exchanges, Binance and Coinbase. Both filed complaints pertain to the listing and trading tokens that the SEC deems to be unregistered securities, as well as claims that the offered earn and staking services are also in violation of securities laws. For Binance, the charges extend further, alleging that the entity engaged in wash trading, and has commingled customer funds between on-shore and off-shore entities.

As news of the Binance charges broke on 5-June, digital asset markets traded lower, with ETH down -5.4%, and BTC down -6.8%. Both assets recovered these losses as news of the Coinbase charges landed on 6-June. However, by the end of the week ETH had sold off further, down -8.2%, whilst BTC held up slightly better at -6.4%.

Given the gravity of the charges against the two largest exchanges, and an increasingly hostile US regulatory environment, we will focus on the investor response, with a specific lens on exchange activity. By inspecting the breakdown of exchange activity, we are seeking evidence that suggests any negative shifts in investor sentiment.

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Exchange Outflows

Immediately after the Binance headlines broke, coins started to flow out of the exchange. The chart below displays the 2-week view of Binance's exchange reserves for the major assets; BTC, ETH, and stablecoins (USDT, USDC, BUSD).

Over the last 7-days, investors have withdrawn their assets at a steady pace, with aggregate stablecoin balances down over $1.6B, equivalent to 20.9% of the total Binance balance. BTC and ETH reserves are down a more modest 5.7% and 7.1%, respectively.

Whilst net outflows have occurred at Binance, we must keep in mind that the exchange still holds some of the largest reserves of any entity on-chain, and their BTC and ETH balances are still quite substantial.

Binance stablecoin reserves display the largest decline of note, having fallen precipetously from over $26.0B in November 2022, to just $6.5B today (a 75% decline). This is driven in part by prior SEC complaints against BUSD, causing issuer Paxos to enter redemption-only mode (WoC 14).

For Coinbase, net reserve changes are far less dramatic, with stablecoin balances remaining flat on the week, and BTC balances declining by just 2,300 BTC (0.5% of total).

Ether balances however did see a very large 291k ETH decline, equivalent to around 8.0% of the total balance. This suggests a more pronounced investor response, perhaps related to the offered staking services coming under fire.

Breakdown of Exchange Deposits by Cohort

Analysing the breakdown of exchange withdrawals by USD size shows an interesting divergence in investor behavior this week:

• Transactions below $10M in size have seen consistent withdrawals, with a net outflow of over $130M/day maintained all week.
• Transactions above $10M in size have seen consistent deposits, with inflow rates ranging between $15M and $30M/day.

This suggests that very large entities (such as institutions) are more affected to a greater extent by the SEC news as compared to smaller entities. It remains to be seen if this becomes a more sustained trend over coming weeks.

The chart below overlays BTC exchange deposit and withdrawal volumes, demonstrating how flows in both directions tend to track each other very closely. This week was no exception, with flows in, and out increasing by around 70% to $845M/day.

Withdrawals on aggregate have outpaced deposits by around 10% this week, suggesting that self-custody remains a preferred strategy for investors overall. A similar dynamic was observed around the last major exchange related news, being the collapse of FTX (WoC 46-2022).

Focusing on aggregate deposit volumes, we can establish a breakdown by cohort type. We can thus identify which investor groups have reacted most significantly to the news:

• 🔴 Short-Term Holders account for 76.4% of deposit volume (23.0k BTC)
• 🔵 Long-Term Holders account for just 1.9% of deposit volume (570 BTC)
• 🟢 Inter-Exchange Transfers account for 21.7% of deposit volume (6.53k BTC)

STHs historically account for a stable ~60% of deposit flows, which suggests recent buyers have been the most active this week. Inter-exchange flows are typically around 35%, suggesting that investors on the margin are preferring to take self-custody, rather than simply transferring coins to a different exchange.

The chart below confirms the first observation, with the STH cohort sending 0.93% of their total held balance into exchanges this week. Whilst not yet above the 1% threshold we often see associated with high volatility events, it is a notable uptick relative to 2021-22 cycle baseline.

Bitcoin Long-Term Holders on the other hand are remarkably calm, displaying no discernible reaction to the news. Their exchange inflow volume this week was just 0.004% of their total holdings, with 66% of all trading days seeing a larger relative inflows.

Realized Apathy

Whilst the charts above point to a subset of recent buyers sending coins into exchanges this week, the deeper picture is even more intriguing. The chart below shows the total Realized Profit, or Loss locked in by exchange deposits, and what we can see is that both sides are relatively small.

Of all the coins flowing into of exchanges, very few of them are locking in any appreciable profit, or loss. In other words, most coins sent to exchanges, were acquired at a price very close to the current spot rate, and likely acquired recently given the dominance of Short-Term Holders.

This speaks to a degree of both confidence (investors are unshaken by the news in aggregate), but also apathy (the current price range isn't sufficient incentive to spend).

With such extreme lows in realized profit or loss, the sell-side risk ratio has fallen towards all-time-lows. This metric compares the aggregate profit/loss locked in by the market relative to the asset size (the Realized Cap).

The total value of profit and loss being locked in is extremely small relative to the current Bitcoin Realized Cap of $391B. Low values of the Sell-side Risk Ratio has historically occurred during periods of heightened investor apathy, typically on the back-side of deep bearish trends.

We can see that aggregate transfer volume is also trading at cyclical lows. This week did not see any appreciable uptick on overall transfer volume, remaining at around $2.85B/day.

Similar to the Sell-side Risk Ratio, we can also compare the amount of realized profit and loss to this transfer volume via the Realized RVT Ratio. This metric is also in a strong downtrend, which is typical of bearish trends, as apathy, and boredom take hold.

Duration and time-pain on the back-side of a bear market is a characteristic of many assets and markets, and here we can visualize this playing out across both of these metrics.

Summary and Conclusions

The regulatory environment in the US remains hostile, with the SEC filing very significant charges against the two largest exchanges, Binance and Coinbase. The balances of major assets on these two exchanges have declined this week, as a portion of customers withdraw out of concern. With the exception of stablecoins at Binance, the declines are well within typical patterns, and it remains to be seen how investors react as both lawsuits play out.

In the immediate term, it appears that many recent BTC buyers (STHs) have sent their coins into exchanges, likely for sale, to de-risk their position. More broadly however, the remarkably low realized profit and loss that was locked in, and almost non-existent reaction by Long-Term Holders suggests that many investors were hardly surprised by the news.

Disclaimer: This report does not provide any investment advice. All data is provided for information and educational purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.

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