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U.S. crypto exchanges' activity, liquidity plummet in wake of SEC lawsuits

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(Kitco News) - The cryptocurrency market enjoyed a strong start to 2023, with Bitcoin’s price rising 90% to top out at $31,165 on April 14. But things have cooled off significantly in the latter half of the second quarter amid enforcement actions by the Securities and Exchange Commission (SEC) and concerns about the health of the broader financial markets.

Robinhood, the popular U.S. brokerage service that also offers access to cryptocurrencies, released its May Operating Data report on Monday which shows that the volume of crypto trading on the platform decreased by 43% in May as compared to April.

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

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

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

Last week, the brokerage firm announced that it would be ending 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 an even lower crypto trading volume on Robinhood.

The decline in volume and active users for the popular fintech app highlights the decrease in engagement the crypto asset class has seen in recent months as regulators in the U.S. have stepped up their efforts to police digital asset service providers.

June has also seen liquidity and activity on the Binance.US exchange plummet as a result of the SEC charging the platform with multiple securities violations.

According to a report by Kaiko, liquidity on Binance.US, which is measured by aggregated market depth for 17 tokens, has dropped 76% in the week following the SEC's lawsuit, falling from $34 million to $7 million.

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

As a result of the exodus of market makers, the exchange has seen its U.S. market share drop to 4.8% from 20% in April.

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

“The sharp drop in liquidity suggests market makers are nervous and want to avoid volatility-induced losses and the non-negligible possibility that their assets could get stuck on an exchange à la FTX collapse,” Kaiko said.

Despite the decline in liquidity for Coinbase, the exchange’s share of the U.S. market spiked from 46% to 64% over the past week, Kaiko noted, but was unable to highlight a specific reason for the increase.

Kaiko said that in the long term, the enforcement actions by the SEC will likely lead to the establishment of a regulatory framework for cryptocurrencies in the U.S., which will ultimately benefit the asset class.

“This week marked an inflection point, with the SEC taking on two of the world’s largest exchanges,” Kaiko said. “Although the resolution may take some time, regulatory clarity is on the way, one way or another.”

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