The legal processes carried out by US regulators against crypto exchanges have had a domino effect on many crypto exchanges.
FTX, which was once referred to as one of the largest cryptocurrency exchanges in the world, had a major collapse as a result of using user assets. The bankruptcies that followed this collapse prompted US regulators to act. Regulators overseeing cryptocurrencies in general have recently intensified their influence on cryptocurrency exchanges. The list also includes strong exchanges such as KuCoin, Binance, Huobi.
US Regulators Turn To Crypto Exchanges
The fact that crypto exchange FTX traded with user assets and suffered a massive collapse as a result has prompted US regulators. Regulators have begun investigating exchanges one by one, intensifying their crackdown on cryptocurrency exchanges.
Regulators have begun to exercise their authority more, taking advantage of existing crypto regulatory loopholes. The lack of global crypto laws and regulations is also disrupting the processes of exchanges and cryptocurrencies. Regulators consider any emerging FUD a threat, as they do not yet have full knowledge of crypto. The most affected crypto exchange is Binance.
Regulators, who started investigations on crypto exchanges one by one after the bankruptcy of FTX, first targeted Russia-based Bitzlato. In this incident, in which the US Department of Justice also stepped in, Bitzlato’s operations were dealt a blow. Looking at the recent news feed, it can be understood that the regulators will not stop.
Dominoes Are Rolling Over on Crypto Exchanges
The legal struggles that started after the bankruptcy of FTX had a domino effect on many crypto exchanges. After Bitzlato came under pressure from US regulators and the US Department of Justice, dominoes began to roll over to other exchanges.
While Binance entered the radar of regulators regarding the issue of BUSD, of which Paxos is the issuer, many rumors were also raised in the press. It was noteworthy that Binance tried to circumvent US regulators with Binance US and was put at the center of the accusations with securities claims regarding BUSD.
In the environment where FTX went bankrupt, Bitzlato was operated, and Binance was on its toes, dominoes began to fall towards other exchanges. KuCoin was sued by the New York Attorney General’s Office the other day. The Attorney General’s Office claimed that KuCoin violated securities laws by offering tokens meeting the definition of securities without registering with the attorney general’s office. Also, in the lawsuit filed, it was stated that KuCoin is a security and carries out unregistered business. The news of this lawsuit caused a strong decline in the crypto money market.
During the hours of this activity in KuCoin, another crypto exchange Huobi was also hit hard. On the Huobi side, it was observed that the exchange’s cryptocurrency HT exhibited interesting movements. This ups and downs, called panic selling and then whale collection, became clear with the statements of Huobi consultant Justin Sun. According to Sun, Huobi’s coin HT had a liquidity shortage and was in such a situation. On the other hand, Kraken and Gemini are also struggling with many legal processes.
Pressures on Crypto Exchanges
With the bankruptcy of FTX, pressure from US regulatory and judicial powers began to intensify. Coinbase, which registered with the Nasdaq side and passed through the regulators, stands out as the crypto exchange that is least affected by these pressures. However, Coinbase may have to terminate its services if it runs into a liquidity crunch. Therefore, pressure from US regulators may be covering the entire crypto industry.
Why cryptocurrency exchanges?
Cryptocurrency exchanges stand out as one of the most important building blocks of the crypto industry. Exchanges bring together billions of dollars of investments, which millions of investors will process, with crypto projects. Crypto exchanges, which are like the banks in the traditional economy in digital currencies, do not escape the attention of the USA.
The continental country, which steers the global economy with the US dollar, focuses on the free flow of dollars in crypto currency exchanges in these periods when inflation is at its peak and interest increases are aimed at increasing the strength of the dollar. The US has never accepted that the dollar should not be controlled by them.
Crypto exchanges are therefore required to register with US regulators, be accountable to US regulators with transaction transparency, and report their securities products. However, the crypto industry, which emerged with the term “decentralization”, has the risk of becoming one of the traditional financial products if it does this.
In the relationship between US regulators and crypto exchanges, which has turned into a conflict environment, Binance’s intense work does not go unnoticed. Binance comes up with an event that will be on the radar of regulators almost every month. However, Binance CEO Changpeng Zhao foresaw these and said that they would be prepared for any attack.
What will happen as a result of these pressures on crypto exchanges?
Regulatory pressures on crypto exchanges can lead to the bankruptcy or collapse of many crypto exchanges. The reason for this can be shown as FTX, which went bankrupt for a while and made everyone learn the concept of “liquidity squeeze”. As a result of FTX’s transactions with customer funds and it was revealed that it did not leave any money in the safe, there was an increase in the number of customers trying to withdraw their money from the stock market in panic. This increase caused FTX to run into a liquidity crunch and go bankrupt.
This is seeing similar functionality on other exchanges. Because crypto exchanges secure user assets with assets on the exchange and try to meet them at a one-to-one rate. If the exchange loses revenue, is hacked or banned, it seems likely that the exchanges that cannot respond at a one-to-one rate will crash.
This is why harsh sentences from US regulators against the reserve evidence system are coming. Because regulators know that thousands of crypto investors will suffer if they create a liquidity squeeze on the exchanges they want to sanction. That’s why US regulators approach crypto exchanges with investigations rather than sanctions. Even this situation panics the investors of the stock market and large asset outflows are observed from the stock market.
If US regulators continue and intensify these pressures, there will be a massive increase in the number of crypto investors looking to save their money. As a result of this situation, fiat currencies that are requested to exit from crypto exchanges can reach billions of dollars.
Crypto exchanges that cannot afford billions of dollars outflow may have to stop withdrawals as a result of deviations in the proof-of-reserve system. Thus, with the domino effect, the collapse of one stock market can lead to the collapse of other crypto exchanges. Because crypto exchanges reflect the existing evidence of reserve assets through their users.
In a possible mass crypto exchange crash, all crypto assets except decentralized exchanges and wallets are on the table as a possible loss. In such a case, as in the FTX and Terra crises, approximately $ 50 billion of money will evaporate.
These risks at the table and the need to protect millions of crypto investors are pushing US regulators to take a more planned and calmer approach. The collapse of exchanges such as MtGox, FTX, Bitzlato, whether the domino will bounce to the next exchanges, and what kind of finale the USA will take over the crypto markets are a matter of curiosity.
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