Bitcoin falls after CFTC sues crypto exchange Binance for allegedly breaking trading rules

Cryptocurrencies dropped on Monday morning after the CFTC sued Binance, the biggest crypto exchange in the world, for allegedly violating trading rules.

The price of bitcoin slid 3.5% to $26,883.11, according to Coin Metrics. Ether fell 3.3% to $1,708.78.

In a court filing, the CFTC, or the Commodity Futures and Trading Commission, said Binance violated eight provisions of a commodities trading law "designed to prevent and detect money laundering and terrorism financing." The lawsuit, which was filed Monday in a federal court in Chicago, has the potential to upend the exchange's operations.

BTC rally has been slowing down over the past week  but today's move is largely Binance-driven

"Many knew Binance had a bullseye on its back, but this is still unnerving some crypto traders," said Ed Moya, an analyst at Oanda. "Binance's success is needed to ensure a good part of the cryptoverse can grow."

Dessislava Aubert, an analyst at crypto data provider Kaiko, said althought bitcoin's March rally has slowed in the past week, the down move Monday was largely driven by the Binance news.

"Binance is the largest crypto exchange and any U.S. regulatory action against it will have huge implications for the industry," she added.

The filing follows a CNBC report on Binance employees that work to subvert the exchange's compliance controls in China, using some of the same techniques that the CFTC alleges Binance to attract U.S. users.

The news is the latest chapter in this year's regulatory crackdown on crypto businesses, which has been a significant price catalyst for bitcoin and helped it diverge from its previously high correlation with stocks. Monday's initial drop was the biggest move for bitcoin since March 22, when the Securities and Exchange Commission issued Coinbase a Wells notice warning the exchange that it identified potential violations of U.S. securities law.

The correlation between bitcoin and stocks has been sitting at its lowest levels since September 2021.

Bitcoin is still on track to cap a winning month. It's advanced 16% in March, while ether has gained 6%. Before Monday, analysts said the March rally may be petering out, but that a long-term bullish formation has been established.

Crypto exposed equities suffered from the news too. Coinbase and Microstrategy each fell 10%. Miners Marathon Digital, Hut 8 and Riot Platforms lost about 8% each.

The losses came in tandem with a surge in bond yields, which pushed the tech-heavy Nasdaq Composite down 0.6%. Rising rates make future profits, like those promised by growth companies, less attractive.

—CNBC's Rohan Goswami contributed reporting