By Elizabeth Howcroft, Hannah Lang and Rae Wee
(Reuters) -The U.S. affiliate of Binance said it was halting dollar deposits, while trading platform Robinhood (NASDAQ:HOOD) Markets said it was delisting some crypto tokens, after the U.S. securities regulator stepped up its crackdown on the crypto sector.
Binance.US, the purportedly independent partner of Binance, said in a tweet on Thursday that its banking partners were preparing to stop dollar withdrawal channels as early as June 13, after the U.S. Securities and Exchange Commission asked a court to freeze its assets. Customers have until Tuesday to withdraw their funds.
The development is the latest blow for the world's largest cryptocurrency exchange and raises questions about whether its U.S. operation can survive the SEC lawsuit, which alleges Binance manipulated its trading volumes and comingled customer assets, among other civil charges that it denies.
"This is very serious for Binance.US," said Clara Medalie, director of research at Kaiko, a digital asset data provider.
"The inability for Binance.US to offer USD trading services in a region the exchange was specifically built to operate in is an existential threat."
On Friday, Robinhood said it was removing three cryptocurrency tokens from its platform that the SEC identified as securities in its lawsuit against Binance and a separate action it filed against Coinbase (NASDAQ:COIN) the following day, in a sign the SEC litigation is already rippling through the crypto market.
The SEC sued Binance, its CEO and founder Changpeng Zhao, and Binance.US's operation on Monday, alleging in 13 charges that Binance had engaged in a "web of deception," artificially inflated trading volumes and diverted customer funds, and that Binance and Zhao were secretly controlling the U.S. entity while publicly claiming that it was independent.
Binance did not immediately reply to a request for comment. It has said it would defend its platform "vigorously," claiming the SEC was limited in reach as Binance was not a U.S. exchange.
In a subsequent filing on Tuesday, the SEC asked a federal court to freeze Binance's U.S. assets, including customer assets that total more than $2.2 billion held in crypto and some $377 million in U.S. dollar bank accounts, according to the agency. The SEC expressed concern that the company could move those funds offshore. Binance.US called the motion "unwarranted."
On Thursday, Binance.US said the SEC action had created "challenges" for its financial services providers and that the exchange would no longer accept dollar deposits as part of plans to change to a "crypto-only exchange."
As of 12 p.m. EDT (1600 GMT) on Friday, investors had pulled more than $31 million from Binance.US in the prior 24 hours, according to data firm Nansen.
BAM Trading, Binance.US's operator, holds customers' funds with California-based Axos Bank, according to a letter from lawyers for BAM Trading to the SEC dated May 26, which was made public by the SEC on Tuesday.
Axos did not immediately respond to a request for comment.
Binance.US had struggled to find banking partners after the failure of Signature Bank (OTC:SBNY), the Wall Street Journal reported in April.
Binance.US said crypto-denominated trading, deposits, withdrawals and "staking" - where users deposit cryptocurrencies for use in blockchain transactions - would remain fully operational.
'REGULATORY GRAY AREA'
Crypto companies started out in a regulatory gray area, but the SEC under Chair Gary Gensler has steadily asserted its jurisdiction over the industry, arguing most tokens are securities and should be subject to the same disclosure rules.
Other U.S. crypto exchanges are likely to be in the firing line as a result of this week's lawsuits, which expand the number of cryptocurrencies that the SEC has identified as securities to include some commonly traded tokens, such as Solana, Cardano and Polygon. Robinhood said it would be removing those three coins effective June 27.
The Binance and Coinbase SEC lawsuits "introduced a cloud of uncertainty around these assets and, as a result, our team has decided to end support for them," the company tweeted.
On Thursday, ratings agency Moody's (NYSE:MCO) changed its outlook of Coinbase to "negative" from "stable," citing the potential impact of the SEC's lawsuit. Shares of Coinbase were last down 1.9% to $53.85.
Coinbase did not immediately respond to a request for comment.