Regulatory Uncertainty is Impacting BTC and ETH Liquidity in the US

• The regulatory environment in the US has become challenging for most crypto projects. And the results are becoming increasingly apparent.
• The ongoing legal actions by the CFTC and SEC against Binance and Coinbase could contribute to a decrease in liquidity.
• Earlier this year, the US faced the collapse of Silvergate and Signature banks. These banks played a significant role in facilitating liquidity flow to crypto-friendly banks and exchanges.

The regulatory challenges and increasing uncertainties in the US have led to a contraction in Bitcoin and Ethereum liquidity, and this is expected to continue.

The Regulatory Environment in the US is Getting Tougher

The regulatory environment in the US has become challenging for most crypto projects. And the results are becoming increasingly apparent. The US Securities and Exchange Commission (SEC) published a list of cryptocurrencies classified as securities months ago.

However, assets like Bitcoin and Ethereum that are not classified as securities seem to be experiencing the effects of these regulatory developments.

According to a recent report by Kaiko, liquidity in Bitcoin and Ethereum has decreased in the US. The data showed that the liquidity ratio of these assets on US-based exchanges dropped to around 43%.

This represented a decrease from the 49% level recorded at the beginning of 2023. In contrast, liquidity depth on exchanges outside the US increased from 51% to 57%.

Potential Reasons for the Decrease in Bitcoin and Ethereum Liquidity

The ongoing legal actions by the CFTC and SEC against Binance and Coinbase could contribute to a decrease in liquidity. In the past, lawsuits were filed alleging that Binance operated a derivatives trading platform in the US and facilitated transactions for cryptocurrencies classified as securities.

In connection with the lawsuit process, the SEC also filed a lawsuit against Binance and Coinbase. The reason behind this was allegations of offering unregistered securities to the general public.

These legal actions also involved multiple tokens. The charges also stated that US-based exchanges should refrain from trading these tokens. Since Binance and Coinbase are the largest exchanges in the US and globally, halting the trading of these listed tokens could significantly impact the liquidity of leading cryptocurrencies like BTC and ETH.

Additionally, earlier this year, the US faced the collapse of Silvergate and Signature banks. These banks played a significant role in facilitating liquidity flow to crypto-friendly banks and exchanges. Their collapse made it more difficult for institutional players to acquire Bitcoin, Ethereum, and other cryptocurrencies using fiat currencies. Following their collapse, most crypto exchanges temporarily suspended USD deposits.

The decline is likely to continue

A 6% decrease in Bitcoin and Ethereum liquidity on US exchanges may seem modest, but there is a possibility of intensification in this trend. This potential increase could be attributed to the increasing uncertainties in the country’s regulatory landscape.