Cleaning Up Crypto Exchange Wash Trading Will Take Global Regulation

When Bitwise Asset Management declared in a March 2019 presentation to the United States Securities and Exchange Commission that 95% of the Bitcoin (BTC) trading volume being reported globally on cryptocurrency exchanges was “fake,” it jolted rating firms, exchanges and the larger crypto world. Data analytics firms recalibrated their exchange ranking metrics, and some assumed it was just a matter of time before wash trading was curtailed if not eliminated.

But wash trading was back in the news last week when the CEO, president and chief operating officer of Canadian crypto exchange Coinsquare were all forced to step down after Ontario securities regulators accused the company of inflating trading volume to the tune of $5.5 billion.

Wash trading involves transactions in which no funds or financial interests are actually exchanged. They are sometimes referred to as “false trades” and are used to bolster an exchange’s reported trade volume. This, in turn, gives the appearance of liquidity and market activity, attracting new users to the exchange. In traditional finance where exchanges are regulated, trade volume is a good proxy for liquidity — but not in the crypto world.

A serious problem

Bobby Ong, co-founder and chief operating officer of crypto ratings platform CoinGecko, told Cointelegraph: “This problem is still prevalent. We still see non-regulated exchanges conducting wash trading, and we don’t have a good measure to tell whether it is getting better or worse over time.”

Meanwhile, John Jefferies, chief financial analyst at crypto forensics firm CipherTrace, informed Cointelegraph: “The Bitwise letter to the SEC was a turning point because it informed investors and regulators on how pervasive wash trading was at that time.” But it didn’t stamp out the practice. “This form of market manipulation is still a serious problem, especially in the 800 exchanges that are not in the Top 40.”

Bitwise’s chief technology officer, Hong Kim, told Cointelegraph that he has seen no uptick in wash trading lately, and since Bitwise made its presentation to the SEC in an attempt to win approval for a Bitcoin exchange-traded fund, or ETF, “enormous progress has been sustained” in dealing with the problem of fake trading numbers — but more work still needs to be done.

Wash trading has even been reported recently on decentralized exchanges, which seems like an anomaly because each trade is recorded on a public ledger and fake trading may be easily detected. It seems that the practice may sometimes take place on Binance DEX and Loopring, showcasing that DEXs can also be affected.

It’s difficult to determine the exact amount of fake volume that exists because data aggregators receive data from the same exchange APIs where wash trades and legitimate trading volumes are indistinguishable, Gerald Chee, head of research at CoinMarketCap, told Cointelegraph, adding:

“Simply put, there is no easy way to tell if an exchange is inflating volumes or not by merely looking at the volumes they report. The only way to truly detect ’wash trades’ would require access to ’account-ID’ data — the actual accounts that performed the trade — and this data is extremely sensitive; only exchanges have access to this.”

Users suffer from false reporting

Wash trading is sometimes characterized as a victimless crime, but the practice can mislead investors. Charles Hayter, founder and CEO of CryptoCompare, told Cointelegraph: “Ultimately it is the consumer who is harmed by it as it is a false representation of depth in the market.”

Investors often feel more comfortable trading on a larger exchange, and the trading volume on a platform “is a factor that a reasonable investor would consider relevant in deciding whether to enter into or maintain a trading relationship,” noted the Ontario Securities Commission in its “statement of allegations” against Coinsquare.

Trading in these markets is a zero-sum game, added Jefferies. “Some unlucky speculator is going to lose the money that the market manipulators gain.” Moreover, Jefferies believes that “the industry as a whole suffers from lack of trust,” which impedes crypto’s growth into a major asset class, given concerns about market manipulation. No crypto-based ETF application has won SEC approval, and wash trading may be partly to blame for that, he suggested.

Wash trading is most prevalent among smaller, newer exchanges looking for a way “to trick new users who may not know who are the most reputable exchanges into opening an account with them,” said Ong, but often at unfavorable rates with high slippage. These exchanges are more likely to be hacked, too, because they often lack the resources to invest in the best cybersecurity practices.

Fake volume is generally created in two ways, explained Kim. Exchanges can be directly involved, just printing numbers or paying someone to trade. But perhaps more common, an exchange can create incentives for users to trade with themselves. The exchange could create a “no fee” top tier for users who trade more than $1 million in a year, for instance. Traders who want to maintain their no-fee top-tier status can do this simply by trading with themselves — at no cost. “The exchange doesn’t have to intentionally create fake volume,” said Kim.

Progress made since 2019

Still, some headway has been made since “Bitwise’s herculean study into trading volume manipulation helped pierce the veil on legitimate vs. spoofed order books,” wrote Messari CEO Ryan Selkis in a May blog. For example, the Bitwise report further encouraged Messari to develop a new set of trading volume metrics — its “Real 10 Volumes” — based on 10 exchanges it believed to have reported “legitimate” crypto trading volumes via their APIs.

Other ratings firms made adjustments in their exchange rankings, including CoinMarketCap, which Bitwise called out specifically by name in its 2019 report, stating: “Despite its widespread use, the CoinMarketCap.com data is wrong […] giving a fundamentally mistaken impression of the true size and nature of the bitcoin Market.”

Chee told Cointelegraph that “we do not disagree with the findings of Bitwise. We still think a large proportion of volumes are not organic in nature,” although he was reluctant to put an actual figure on false reporting, given the lack of objective data. But when CoinMarkeCap unveiled a new exchange ranking methodology that shifted from volumes to a mixed system of web traffic, liquidity and volumes, it saw a more than 50% drop in the globally reported volumes of exchanges. In 10-plus exchanges, the reduction in reported trading volume exceeded 90%. “This is indicative of prior wash trading, as exchanges are no longer incentivized to inflate volumes,” explained Chee.

Related: Crypto Exchange Ranking Methods Still Contested as CMC Takes More Heat

When CryptoCompare revamped its crypto exchange benchmark, it gave considerable weight to jurisdiction — i.e., if the exchange is domiciled in a regulated environment. A regulated jurisdiction suggests the exchange is going to do things by the book, Hayter told Cointelegraph. Other factors such as website traffic — used by CoinMarketCap and others — are less useful in determining the authenticity of trading volume, according to Hayter, who went on to add:

“Website traffic, although sometimes useful for gauging popularity, is not really accurate — as lots of exchanges trade via API which will not be accurately represented. Coupled with that exchanges with high web traffic tend to be using populist promotions which in the long run tend to be empty promises.”

A regulatory divide?

Some view wash trading as a problem caused by having so many unregulated exchanges, as they “have a much higher instance of wash trading,” said Jefferies. “Until recently this included Canada, where Coinsquare was accused of wash trading 590,000 BTC, and the CEO, President, and the COO were forced out.” CoinGecko’s Ong told Cointelegraph:

“Unfortunately, many of the unregulated exchanges, especially those coming from China, are heavily wash trading and faking their volume. They have trading bots running to boost volume to appear larger and more liquid than what they actually are.”

This is apparent from situations where the bid-ask spreads are huge — more than 50% — but trades of more than $100 million are still reportedly taking place between the bid-ask spread, Ong added. “We have also seen exchange websites going down but API still spewing high trading volume data.” By contrast, exchanges in regulated jurisdictions are not facing these issues. Chee agreed: “Jurisdictions like the USA, Europe, Gibraltar, Japan, among others, generally have licensed exchanges that are more compliant to laws against market malpractice,” including wash trading.

Asked if having a regulated jurisdiction matters when it comes to eliminating false volume reporting, Kim answered that it matters 100%. In an unregulated jurisdiction, there is no penalty for claiming to have $1 trillion in trading volume when, in fact, there is only $1 million.

What about exchanges with “some” inflated volume?

Ratings firms have been reluctant to eliminate all non-regulated exchanges from their rankings, however. When Messari went with only the top 10 “clean” exchanges, it found that it eliminated a large part of the market. Specifically, it removed exchanges with some inflated volume but also legitimate trading volume — companies such as Bithumb, Upbit and Coinone in South Korea; Liquid in Japan; and Huobi, OKEx, OKCoin and Gate.io in China, said Selkis.

Messari eventually added 10 more exchanges to its “real volume” metric, but it applied a 50% “haircut” to those gray-volume Korean and Chinese exchanges to better approximate their true volumes. According to Selkis, “We believe this better reflects the magnitude of adjustment necessary vs. simple web traffic comparisons, which usually discount these volumes by approximately 90%.”

Bitwise’s Kim, however, is wary about discounting — i.e., applying “haircuts” to — exchanges with inflated trading volume. In an unregulated jurisdiction, an exchange can report anything it wants with impunity. It can create a trading volume number out of thin air. Applying a 50% haircut to this number could still leave the exchange with $1 trillion in reported trading. So, the exchange’s “big lie” strategy remains alive and well.

On the other hand, if exchanges offered proof of reserves, “Wash trading would go away altogether,” said Kim. Kraken and a few others have done something like this. “It’s a doable thing, but the community isn’t demanding it.”

Marketing surveillance tools can help

Global regulation may be the long-term answer, but in the medium term, market surveillance and virtual asset service providers giving transparency can help curtail wash trading, said Jefferies. Kim agreed that exchanges, even in non-regulated jurisdictions, can make use of market surveillance tools if they are serious about curbing wash trading.

In the interim, rating firms and others will have to continue to look beyond trading volumes as the sole metric in determining an exchange’s quality. “We will need to look at more metrics to get a more holistic view of the exchange,” said Ong, whose firm has added factors such as order-book depth, bid-ask spread, web traffic estimates, API quality and cybersecurity practices to its “Trust Score” rating algorithm.

In sum, the problem of wash trading is not likely to be remedied overnight. This market malpractice is a “regulatory problem and not a data-related problem,” as Chee told Cointelegraph, but the market is decentralized and most exchanges exist outside a regulator’s reach, so moral suasion and community pressure can only work up to a point. In the end, a regulator’s stick — as recently seen in Canada — may be the only way to totally eliminate wash trading. “If you fear your right to operate will be imperiled, you won’t lie about trading volume,” said Kim.

Dutch Regulator Approves Tokenized Real Estate Crowdfunding Platform

Max Crowdfund, a blockchain-powered real estate crowdfunding platform connecting property developers and investors, has received approval from the Financial Markets Authority in the Netherlands.

With approval from the AFM, Max Property Group — the platform’s parent company — will commence the platform’s roll-out in partnership with distributed ledger technology provider Jelurida.

Investors pay a one-time fee equal to 0.1% of their investment, in addition to monthly administration fees of 0.1%. The fees will be used to purchase and burn MPG’s security tokens.

Max Crowdfund attracts 70,000 users pre-launch

The platform seeks to democratize real estate investment, with investors able to gain exposure from as little as 100 euro ($117.50). Developers and investors are able to raise money from the public using the platform, and can pitch to an international audience.

The platform is the first of its kind to be greenlit by the Dutch financial regulator, and will be available as an app on both iOS and Android. 

The platform claims to have already attracted over 70,000 registered users prior to launch.

Ardor powers real estate crowdfunding platform

Speaking to Cointelegraph, MPG CTO Erwin van Kekem stated that the idea for a blockchain-powered global real estate crowdfunding platform was conceived in 2017 — just 12 months after MPG was incorporated.

The platform will be powered by Jelurida’s Ardor blockchain, with Kekem emphasizing its “multichain architecture” in allowing companies to “spawn their independent child chain” from the platform as appealing to MPG’s needs.

Kekem noted that the platform has already received loan applications, predicting a public launch “over the next months.”

MPG has also commenced a security token offering that seeks to raise $4.4 million over five rounds of $880,000 that will issue 20% of the firm’s equity. The tokens will be issued by MPG directly.

Why Bitcoin Is Protected by the First Amendment

Justin Wales is a lawyer and the co-chair of Carlton Fields’ national blockchain and virtual currency practice. He is an author of “State Regulations on Virtual Currency and Blockchain Technologies.” This article is adapted from the paper here.

Regulators tend to view virtual currencies monolithically, treating cryptocurrencies like bitcoin no differently from centralized projects that share little in common with it. As a result, the federal government and many states define “virtual currencies” in such broad terms that anyone dealing in them is required to obtain a license and keep records about their customers. 

See also: Decentralization and What Section 230 Really Means for Freedom of Speech

To a hammer, everything is a nail and to many regulators every virtual currency is money. But the instinct to focus solely on the monetary functions of these technologies ignores the associational and expressive characteristics of decentralized networks. In other words, the regulators don’t know what they’re dealing with and we’re not doing a good enough job of explaining it to them.

As an industry, we should reframe the discussion about bitcoin and its progeny away from their uses solely as digital money and instead describe them as onramps to decentralized networks capable of much more. Once properly viewed as conduits to global communicative technologies, it becomes clear that participation in these networks is protected by the First Amendment to the United States Constitution.

Expression and association

The First Amendment contains several important guarantees, including the freedoms of expression and association. Since its ratification, these rights have been extended to new forms of expression made possible by technological innovations. In Packingham v. North Carolina, the Supreme Court reaffirmed that the First Amendment applies to online networks and protects our rights to express and associate through them. The use of the internet for expressive and associative purposes is as protected as the use of parchment or congregating in a town hall as was envisioned by the Founders.

Like the internet itself, Bitcoin’s network enjoys broad First Amendment protections. For this article, I’ll limit the analysis to Bitcoin, but the principles discussed should apply to any network that shares Bitcoin’s open, borderless, censorship-resistant and immutable characteristics. 

At its most basic level, Bitcoin is a protocol by which like-minded participants across the world maintain a public truth. Nodes maintain a record of that truth and miners work to ensure the record is accurate. Anyone can join Bitcoin’s network and the software needed to do so is freely available. 

We should reframe the discussion about bitcoin and its progeny away from their uses solely as digital money.

bitcoin is not money. Rather, I’m advocating for an understanding that it is much more than money. As Andreas Antonopoulos explained in his 2016 book “The Internet of Money”: “Saying bitcoin is digital money is like saying the internet is a fancy telephone. It’s like saying that the internet is all about email. Money is just the first application.”

Decentralized networks present powerful non-monetary use cases. From Bitcoin’s first block, which contained Satoshi’s famous “Times of London” message, its ledger has been used to immutably preserve non-financial content. In the decade since its creation, Bitcoin has been used to publish political messages, artistic expressions, memes and much more. Bitcoin’s limited block size makes it an imperfect vehicle for this use, but other networks, including forks of Bitcoin, are actively experimenting with decentralized publications and social media platforms.  

Finance-expression line is blurred

The ability to immutably publish content onto a globally maintained network free from political or corporate censorship may emerge as a powerful tool against oppression. And that is but one use case for a globally maintained ledger. 

When one considers the authentication tools or smart contract applications proposed for Bitcoin (utilizing RSK) or made possible by Ethereum and other chains, the potential applications for these networks is vast. For regulators charged with overseeing the purchase and use of virtual currencies needed for these and other yet unknown applications to run, it may be that there are instances where the use of a virtual currency is constitutionally more analogous to a modem or fiber optic cable than a dollar.

See also: Jill Carlson – Tearing Down Monuments Isn’t Censorship – It’s Speech

We’ve all heard the phrase “Money is Speech,” which stems from the U.S. Supreme Court’s recognition that the use of money can itself be an expressive act. One has a right to donate to a political party because we view that type of spending not as financial, but as communicative. 

Because of Bitcoin, money is no longer restrained to a dollar’s limitations. Accordingly, the range of expression one is capable of has been expanded because money has taken on a more useful form. 

An example of this is the Lightning Trust Chain that occurred last year when Bitcoin’s Lightning Network was used to send nominal micropayments across the globe as a commitment to borderless communication. The ability to transact across borders in amounts less than a penny expands the range of expressive and associational opportunities available to us and should not be regulated in the same manner that we regulate typical financial transactions.    

Bitcoin’s expressive potential

Bitcoin has forced money to outgrow its prior form and, as a result, has extended the range of expressions we can achieve. Because most people will only be able to take advantage of these new capabilities by first purchasing a cryptocurrency, there very well may be times when such transactions must be left unregulated. That is not to say bitcoin is immune from regulation, and there are clearly instances when it should be treated as a currency, but we must understand that it is not always the case.

As decentralized networks continue to expand our ability to associate and express with one another, we must remain cognizant that the First Amendment has always grown to embrace new technologies and protect the expanding expressive opportunities they create. Through this understanding, it is clear that efforts to treat all virtual currencies as the same without any consideration for the expressive benefits of associating with a global, decentralized network may be constitutionally problematic.

Disclosure

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Carbon Credits Have a Double-Spend Problem. This Microsoft-Backed Project Is Trying to Fix It

The InterWork Alliance (IWA), a tech-agnostic token standardization initiative that grew out of the Enterprise Ethereum Alliance, is working on blockchain tools to prevent the “double-spending” of carbon credits.

Carbon accounting works by allowing countries or corporate entities to pay for their carbon-emitting sins, thus creating a market mechanism to drive industry toward greener processes.

But there’s a problem.

“There’s no way right now for you to determine that a tree hasn’t been sold 100 times over,” said Microsoft blockchain architect and IWA Chairman Marley Gray.

The Microsoft-backed IWA sustainability group is stepping in with a tokenization standard that aims to bring transparency to carbon accounting.

Read more: Firm Uses Ethereum to Tokenize Sustainable Infrastructure in Fight Against Climate Change

Large companies can offset their carbon emissions by participating in and funding environmentally friendly projects. However, there is a distinct lack of verified carbon-offsetting credits, said Gray.

“There are not enough verified – verified is the key word – carbon offset credits in the world today just to satisfy Microsoft’s needs for this year,” said Gray. “That was an eye-opener. Every major corporate is coming out with these big sustainability goals, so we have to do something dramatic to improve the supply of verified offsets.”

IWA’s solution

The IWA sustainability working group includes Accenture, Climate Chain Coalition, Digital Asset, Nasdaq, Neo Global Development, R3, SIX Digital Exchange (SDX), Xpansiv and others. The group will create a standardized framework for tokenization, starting with voluntary carbon offsetting, and will then expand its focus to regulated markets in the near future.

This is not a new problem and numerous technologists have tried to come up with ways to make carbon accounting more rigorous, including using blockchains

“You had a lot of startups go after these spaces, and everyone’s sort of building these walled gardens that don’t match the buyers’ requirements,” said Gray. “So we decided to back the bus up, and get everyone to agree on what a carbon credit is, how it’s structured and how we should then tokenize that to solve our double-spend credit problem.”

Read more: Hyperledger Conference Shows Where Blockchain Can Fight Global Warming

The term “carbon credit” has become overloaded, said Gray. Part of the IWA’s mission is to break down the different types of carbon credit for tokenization, such as EU-issued carbon credits traded on regulated markets. 

Carbon offsets, on the other hand, can be either derived from avoiding emissions by, for instance, using renewable energy, or by removing emissions via projects that plant trees. Illustrating the problem, these two variants are measured differently and priced differently, said Gray.

When it comes to verifying carbon offsetting projects, firms don’t care whether there’s a blockchain underlying the solution, they just want to be sure it’s trusted and transferable, Gray added.

“We have to be able to define a project so that buyers of carbon credits can find out the project details and see the provenance of that carbon credit and its worthiness,” he said.

Disclosure

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Cryptocurrency funds rally as bitcoin hits a 2-month high – MarketWatch

Crypto funds surged Monday as bitcoin BTCUSD, +1.22% broke out from a recent trading range and rose to its highest in two months. There is no exchange-traded fund made up of direct crypto assets, although regulators are considering numerous applications for one, but two trusts are often used as proxies for digital currencies. The Grayscale Bitcoin Trust GBTC, +4.23% was up more than 12% at midday, while the Grayscale Ethereum Trust ETHE, -10.31% jumped nearly 30%. Many analysts believe demand for bitcoin is rising for the same reasons demand for gold GC00, +0.22% has surged: investors are seeking alternatives to stocks and cash. Bitcoin traded at about $10,354 at midday, up nearly 5% for the day, and some experts believe it could head to $15,000 next.