What is crypto wash trading?
Crypto wash trading is when one entity executes both sides of a trade, both buying and selling a cryptocurrency or NFT. When done extensively, this can mislead investors into believing that the trading volume and/or market value of a token is higher than it is in actuality.
Bad actors often go to great lengths to make their wash trades look like organic trading. Solidus Trade Surveillance monitors for several variations on vanilla wash trading, including A-B-A, multi-party, cross-market, circular, and money- & volume-pass wash trading to see through these obfuscation techniques.
Why are cryptocurrencies and NFTs wash traded?
The intentions behind crypto and NFT wash trades vary. In some cases, fraudsters will wash trade scam tokens to attract retail investors who, once they’ve bought the token, will be unable to resell them due to exploits encoded in the token’s smart contract. In others, NFT holders will wash trade their NFTs to raise the “floor price” of a NFT collection, generate interest among speculators, and/or earn activity-based rewards from NFT marketplaces that incentivize wash trading.
An illustrative example of NFT wash trading made headlines in October 2021 when the owner of CryptoPunk #9998 used a flash loan to sell it to himself at a price of $532 million.
Crypto wash trading in practice: Hydrogen Technology Corporation
In September 2022, the U.S. Securities and Exchange Commission (SEC) charged the CEOs of Hydrogen Technology Corporation and Moonwalkers Trading Limited for “perpetrating a scheme to manipulate the trading volume and price” of the HYDRO token, an unregistered crypto security.
NFT wash trading in practice: LooksRare Marketplace
Within a month of LooksRare’s January 2022 launch, the NFT marketplace’s trading volume was more than triple that of its top competitor, OpenSea. But over the same period, seventeen times fewer traders used LooksRare than OpenSea, and on January 28th it was estimated that more than $8.3 billion had been wash traded on the marketplace as users attempted to game the platform’s trading rewards model. This inorganic trading accounted for as much as 80% of LooksRare’s total trading volume up to that point.
Is crypto and NFT wash trading illegal?
In the United States
Wash trading is prohibited in the United States under the Securities Exchange Act of 1934 and the Commodity Exchange Act. Whether certain cryptocurrencies are securities or commodities is an open question, but this uncertainty has not been a barrier to the CFTC or the SEC, who have both brought wash trading cases against crypto players using current law. In March 2021, the CFTC ordered Coinbase Inc. to pay $6.5 million for false reporting and wash trading.
While there is no specific prohibition of NFT wash trading in law, those who engage in it may face enforcement as well. Reuters recently reported that the DOJ is looking for opportunities to bring prosecutions in the NFT space, and the agency's recent NFT insider trading indictment – brought alongside the SEC against a former OpenSea employee – shows that the DOJ sees addressing crypto market manipulation as a priority.
In Thailand
Sections 46 and 48 of the Thai SEC’s Emergency Decree on Digital Asset Businesses set out a number of rules banning unfair digital asset trading practices. These rules explicitly forbid “purchasing or selling digital assets in such a manner that misleads other persons” regarding the purchase price or trading volume of any digital asset.
In September 2022, the Thai SEC issued civil sanctions against LLC Fair Expo and one individual for creating fake volume on the Satang exchange. These two offenders were ordered to pay 12.1 million baht ($318,000).
In South Korea
In January 2019, two executives from South Korean crypto exchange Komid were sentenced to jail time for faking trading volume and deceiving investors. CEO Hyunsuk Choi, the court found, made a number of fake accounts on the exchange in January 2018 and, using a trading bot, made millions of false transactions.
In Canada
In July 2020, Coinsquare agreed to settle with the Ontario Securities Commission (OSC) for market manipulation after it reported inflated trading volumes. Between July 17, 2018 and December 4, 2019, Coinsquare performed approximately 840,000 wash trades representing over 90% of its reported trading volume.
What exchanges can do to prevent crypto and NFT wash trading
Crypto exchanges, NFT marketplaces, and other crypto market participants can take concrete steps to prevent wash trading. Solidus' Trade Surveillance module is built to identify various types of crypto and NFT wash trading, assign a risk score to these trades, and aggregate these alerts into one unified case per entity. Compliance teams can then analyze these cases to determine next steps and escalate.
