Federal Investigation Uncovers Wash Trading Scheme Among Crypto Market Makers
On Friday, October 11, 2024, Matt Levine published an opinion piece on Bloomberg Law discussing crypto wash trading and its implications for the cryptocurrency market.
In the piece, Levine highlights the role of market makers in financial markets, explaining that their primary function is to facilitate trading by providing liquidity. Market makers quote prices at which they are willing to buy or sell securities, thus enabling transactions between buyers and sellers. However, Levine raises concerns about the emergence of dubious practices among certain crypto market makers, specifically wash trading.
Wash trading refers to the practice of trading an asset back and forth between accounts controlled by the same entity to create a false impression of market activity. This manipulation can mislead investors into believing there is significant interest in a cryptocurrency, potentially inflating its price.
Levine cites a federal investigation that uncovered a scheme involving three crypto market-making firms—ZM Quant, CLS Global, and MyTrade. These firms allegedly agreed to engage in wash trading to artificially inflate the trading volume of NexFundAI’s cryptocurrency token. Unbeknownst to them, NexFundAI was a fictitious entity created as part of a sting operation by federal prosecutors.
The probe was sparked by a tip from the U.S. Securities and Exchange Commission (SEC) regarding another crypto company, Saitama, which is accused of using market makers to manipulate its token’s price. The investigation found that representatives from the charged firms participated in video calls and chats, offering to manipulate the price of NexFundAI’s token to attract investors.
According to court documents, one market maker indicated a willingness to execute a plan to increase the token’s price from one dollar to two dollars during a March 18 video call. The SEC’s findings indicate that such practices are rampant in the crypto market, with institutional actors allegedly targeting retail investors with misleading promises.
The SEC’s enforcement actions have highlighted the risks posed to retail investors by these fraudulent activities. Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement, emphasized that the enforcement actions aim to protect investors from being victimized by manipulative practices in the cryptocurrency markets.
One of the firms implicated in the investigation, Gotbit, claimed on its website to offer comprehensive market-making services, including trading algorithms and personalized strategies. However, the SEC’s complaint against Gotbit reveals that the firm engaged in manipulative trading tactics to inflate the prices and volumes of its clients’ crypto assets, misleading investors about the market’s genuine interest.
Gotbit reportedly generated fake trading volumes often reaching millions of dollars by executing trades with itself. This self-trading constituted a significant portion of the total market activity for many of its clients, sometimes exceeding 90 percent of their trading volume. Such actions are designed to create an illusion of market interest, prompting real investors to participate in trading these artificially inflated tokens.
The SEC’s investigation further detailed how Gotbit worked with a crypto issuer named Robo Inu. The firm was allegedly hired to manipulate trading volume to attract investors. During discussions on Telegram, Robo Inu’s representatives expressed dissatisfaction with their marketing efforts and sought Gotbit’s assistance to increase trading volume through wash trading.
From February 2022 to June 2023, Robo Inu reportedly paid Gotbit between $3,000 and $6,000 monthly to execute these manipulative trading practices. Gotbit informed Robo Inu’s leaders that they could generate any desired trading volume, with suggestions to initiate artificial daily volumes of up to $200,000.
Levine illustrates that the crypto market is particularly vulnerable to such manipulative practices due to the lack of regulation and oversight compared to traditional financial markets. The absence of stringent compliance measures allows unscrupulous actors to exploit the system and deceive investors.
Amid these revelations, the SEC continues to work towards ensuring that investors are protected from fraudulent activities. The agency’s efforts aim to hold accountable those involved in market manipulation and establish a more transparent trading environment in cryptocurrency.
As the cryptocurrency market evolves, the practices of market makers and the prevalence of wash trading remain critical areas of concern for regulators and investors alike. The SEC’s actions reflect a commitment to addressing these challenges and safeguarding the integrity of financial markets.
Source: Bloomberg Law
