Popping the Crypto Bubble by Diehl Stephen & Akalin Jan & Tseng Darren

Author:Diehl, Stephen & Akalin, Jan & Tseng, Darren
Language: eng
Format: epub
Publisher: Consilience Publishing
Published: 2022-06-15T00:00:00+00:00

It is challenging to secure reliable information about these exchanges and their transaction volumes. Most of the volume between exchanges themselves may be a complete fabrication as it is in the interest of exchanges to simulate liquidity on their markets by a process known as wash trading. Wash trading is when market participants repeatedly buy and sells products to themselves in order to to simulate market action to accounts they control. Wash trading is illegal in all other regulated markets except the crypto market, because it creates false price signals which do not correspond to any actual economic activity.

Similar to wash trading is painting the tape, a form of market manipulation whereby an economic cartel of insiders coordinate to influence the price of an asset by buying and selling it amongst themselves purely to create the illusion of demand. Cartels are undesirable in markets because they give rise to information asymmetry and warp price formation of assets in ways that degrade public trust in the market and inhibit legitimate commerce.

How many transactions on the bitcoin network are real exchanges between independent individuals, or how many non-economic transactions are being created to simulate volume remains largely unknown. The closest insider information on this data is the Bitwise ETF proposal to the US Securities and Exchange Commission, which posits that 95% of cryptocurrency exchange volume appears to be fake or non-economic wash trading. [86], [216]

Exchanges that operate in the United States must collect KYC identity information on those opening up accounts. However, regulations around customers can often be less stringent outside the United States. An unspoken feature of many offshore exchanges is neither having anti-money laundering (AML) enforcement nor know your customer (KYC) obligations. This allows customers to transact outside the law unbounded by any domestic regulation. [217]

Executives at exchanges note that a cat and mouse game is being played, interfacing this wild west environment with the existing banking infrastructure. Exchanges that allow dollar withdrawals must go through a constant cycle of shifting shell entities and opening new corporate bank accounts whenever their previous accounts gather scrutiny or become frozen by officials. This network of banks and correspondent banks forms the network by which these exchanges can interface with existing domestic and international transfer systems in the United States and Europe by routing through proxy institutions which mask the suspicious origin of funds to and from the exchange.

Cryptocurrency exchanges are also notorious for platform risk. The highest volume exchanges are almost exclusively the main entry point for new retail investors and are overwhelmingly unregulated and unsupervised, with little recourse in the courts when fraud occurs. Exchanges in Asian markets have a mixed variety of legal reputations, and in Japan, there have been significant issues with the exchanges acting as gateways for money laundering. In 2018, Japanese regulators issued orders to six major exchanges: Bitflyer, Tech Bureau, Bitpoint Japan, Btcbox, Bitbank, and Quoine, for additional scrutiny on transactions. Many of these exchanges had some form of involvement with the Japanese organized crime group, the Yakuza.

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