14 Jun 2023

Implications of the SEC charges and lessons from XRP

Last week’s SEC charges against Binance and Coinbase caused turmoil in the market, particularly for tokens implicated as Digital Asset Securities in the filings.

In Short

All tokens implicated in the SEC case, apart from SOL, have seen negative returns from the BTC bottom of November 2022. What can we expect onwards, and what are the lessons from the lengthy XRP case?
The combined market share of BTC, ETH, and stablecoins currently sits at 80.5% for the first time since February 2021. Additionally, all coins mentioned as potential securities in the filing, apart from SOL, have now yielded negative returns since the BTC bottom of November 21, 2022. The current uncertainty has multiple implications, most notably a plausible act of caution from institutional investors to allocate to altcoins amidst the murky regulatory background of the implicated tokens. Funds will likely retort to a hands-off approach due to excess compliance work and overall low trading volumes, disincentivizing market participants to engage. This could limit liquidity further onwards and lead to a prolonged slow market.
Source: Coingecko *sorted by mcap
Token holders should brace for a dragged-out judicial process in light of the ongoing XRP charge, which has currently lasted 2.5 years, as we elaborate further below. An underappreciated development from the aftermath of the charges has been the firm acknowledgment of BTC’s commodity properties, highlighted by SEC chair Gary Gensler. Ether has also yet to be implicated, potentially due to the longevity of its existence. Over the next year, we could thus see the BTC and ETH dominance strengthen further due to the cost and risk burden of allocating capital to altcoins from the 2017 era and beyond.

Lessons from the XRP case

Although SEC’s current charges indirectly aim to implicate tokens as securities, in contrast to the direct charge against XRP and Ripple, we may use the XRP case as a proxy for potential long-term effects on the implicated tokens.
Source: Tradingview
The SEC vs. Ripple case started in December 2020, coinciding with the start of the crypto bull market of 2021. XRP plunged following the lawsuit but rallied alongside the rest of the market in Q1 2021, seeing 650% gains from Dec 20 to Apr 21. Nonetheless, XRP’s 2021 peak sat 34% below the 2018 peak of $2.79, as XRP was constrained by the regulatory backlash, in addition to a highly debatable use case, in and of itself limiting institutional inflows. The current implicated tokens have significant institutional backing, best exemplified by the burgeoning VC investments in the Solana ecosystem. In contrast, XRP has always been a retail darling, with investors who are less constrained by security allegations. A solid institutional presence could thus further limit a token’s ability to recover amidst the current SEC cases, reducing the likelihood of implicated tokens revisiting former all-time highs.
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