Like a limp handshake, the fall of FTX served as a pitiful introduction to readers new to the new crypto industry. A once niche segment of finance has been brought into the mainstream, and now everyone and their mother knows the name Sam Bankman-Fried .
Since the beadlam started in November, countless people have told me that their views on cryptocurrency have changed. Bearishness is on the rise — and much of it can be attributed to a widespread loss of confidence.
Unfortunately, when you delve deeper into the practices of opaque cryptocurrency exchanges, there is little to restore that faith.
1. Yes, FTX showed us why gambling with customer funds is bad, but evidence of a less well-known fraudulent practice called “laundry trade ” have also spread through the cryptocurrency sector, according to the National Bureau of Economic Research.
In a working paper published last month, the group concluded that free transactions account for up to 70% of all transactions on unregulated crypto exchanges.
This shows widespread fraud and deception, as my colleague Jennifer Sor writes.
Imagine that I open a lemonade stand. I want people to think my lemonade is the best in town. My business partners (in this case, some neighborhood kids) come in, buy the lemonade, and claim its wonderful refreshing qualities. They may be loudly declaring that they would happily pay a lot more than I’m asking for a glass of this.
Soon everyone will want what I sell.
Maybe that’s an uneven metaphor, but you get the idea. People want what other people are interested in. In spot trading, a party trades with itself to create the illusion of more liquidity than exists and artificially inflate the price of the asset, which can attract inexperienced investors.
Of course, schemes are usually more complicated than pretending to buy your own lemonade.
Timothy Kreidl, director of regulatory affairs at Blockchain Intelligence, told Insider that wash trading is market manipulation.
“In every industry there is competition, – said Cradle. “That’s not an excuse to go and do a spot trade and try to make your exchange more liquid than it really is, especially when you’re dealing with cryptocurrency.”
And these are not just some little-known stores. NBER researchers estimate that spot trading accounts for nearly half of all transactions on Binance, the world’s largest cryptocurrency exchange by volume. (A spokesperson for Binance told Insider that it does not engage in this practice.)
Similarly, at KuCoin, another top five cryptocurrency exchange, 52.9% of transactions consist of “flush” trades (which the company has denied).
