On-chain report: Where are funds moving after SEC sues Coinbase? Ether outpacing Bitcoin withdrawals

Key Takeaways

• The SEC sued Binance on Monday and Coinbase on Tuesday
• 5% of Coinbase’s Ethereum balance was withdrawn Tuesday, with around 3% of Binance’s reserves withdrawn
• Overall, the movements are not significant compared to previous episodes or average daily outflows
• Bitcoin saw even less withdrawals, negligible amounts withdrawn from each exchange
• Coinbase’s lawsuit presents as the more intriguing of the two, with the exchange floating on the Nasdaq stock exchange in 2021 and overtly striving for clear regulation

The great regulatory clampdown of 2023 stepped up a notch this week, as the SEC filed lawsuits against the two biggest exchanges on the planet. Binance was sued Monday, and Coinbase got the same treatment less than 24 hours later. 

In this piece, we look on-chain to see what the money is saying, as the crypto space digests the news. 

Bitcoin withdrawals relatively steady

On Binance, the Bitcoin balance has dropped from 704,000 on Sunday to 689,000 Tuesday. That represents an outflow of around 15,000 Bitcoin – totally insignificant compared to both the total balance and the normal balance flow we see over any given 48 hour period.  

Coinbase were sued a day later (Tuesday compared to Monday), so we have less of a period to work with. But there has been nothing unusual here either, an outflow of 550 Bitcoin on Tuesday a negligible flow of around 0.1% of the total balance.  

Hence, there really is nothing to see with regards to Bitcoin’s on-chain movements, at least as of Wednesday morning when I am compiling this. Bitcoin’s price has also rebounded well, trading at $26,800. Prior to the lawsuits, it traded at $27,000. It was trading at around $25,500 for most of Monday, down 5.5%, before bouncing back. 

Ethereum withdrawals increasing from exchanges

On the Ethereum side, things are different. Flows are not crazy, but are certainly notable. Tuesday saw nearly 5% of Coinbase’s ETH withdrawn, with Binance releasing around 3%. 

This is likely related to the nature of the lawsuits themselves, a key crux of which alleges a violation of securities law. The SEC listed an laundry list of tokens as securities, however Ethereum was a notable omission. Nonetheless, SEC chair Gary Gensler has refused to comment on whether ETH does or does not constitute a security, and there has been much speculation (and fear) in the crypto market about where Ethereum fits in. 

Additionally, the SEC outlined Coinbase’s staking programme, which includes Ethereum, as being in breach of regulations: “Today we charged Coinbase, Inc. with…failing to register the offer and sale of its crypto asset staking-as-a-service program”. 

This could be one reason for the heightened withdrawals of Ether compared to Bitcoin. The latter is viewed as the closest to a commodity, at least in the eyes of the law. Intuitively, it makes sense, too – Bitcoin pays no yield, no dividend and has a predetermined supply. Ether flipped to proof-of-stake in September and sits in a grey area of the law, not really fitting in cleanly to any predetermined category. 

While many are adamant it is not a security – and thus far at least, the SEC seems to agree – this battle for crypto’s future does seem to be focused more on altcoins rather than Bitcoin. Not only that, but Bitcoin is generally less volatile than other coins, including Ether. The lower movement is not overly surprising in this context. 

Finally, while Ether has seen more withdrawals than Bitcoin, these are not overly notable. They are nowhere near the same scale as past incidents, such as the flow of coins out of exchanges after FTX collapsed in November, or other crises last year such as Terra or Celsius’ meltdowns. 

What next for crypto?

As for what happens next, that is a lot less black and white than simply observing how many coins have moved on the blockchain. I wrote yesterday morning about how inevitable the Binance lawsuit, and what a challenging development it represented for the entire space. 

This was hours before the Coinbase lawsuit was revealed. As I said yesterday, I believe the Binance lawsuit was brought upon themselves in a lot of ways, with regard to their opaque business model, refusal to be transparent, and convoluted corporate structure. Not only that, but multiple investigations were ongoing, and stories of related trading entities and circumventing money laundering laws were never going to end well. 

In my view, the Coinbase case represents much more of a threshold moment for crypto. This is an exchange that strived to be compliant and played by the rules, at least overtly. Binance, in the words of its own chief compliance officer, never wanted to be regulated. But Coinbase floated on the stock exchange in 2021 – a move which the SEC allowed, evidently. Now it is being sued for being an unregistered securities exchange. I’m no lawyer, but it sounds like a captivating case, and one which will inevitably have massive implications for the entire space. 

Binance, on the other hand, is less intriguing for me. They have openly played fast and loose, and their lax restrictions for US customers were well known. They still claim to have no physical headquarters, and operate unconventionally in every sense of the word. When it comes to lawmakers, that is rarely a good thing. 

Either way, the past couple of days have been very concerning for crypto as a whole. It feels like the roof is caving in and the party is being shut down. Whatever your views on whether this is a good or a bad thing, I’m not overly surprised. This is the reality, and the relatively muted price and withdrawal action shows that the market is not overly shocked either.