Crypto Fraud: Study Reveals More Than 70 Percent Of All Crypto Transactions On Unregulated Exchanges Are Wash Trades | news

• NBER investigates a total of 29 crypto exchanges
• Numerous fraudulent transactions detected
• Fewer wash trades on regulated exchanges

Coinbase & Co. examined for transactions

The US research organization National Bureau of Economic Research (NBER) published a discussion paper titled “Crypto Wash Trading” in December 2022, presenting tools to detect fraudulent transactions in crypto exchanges. Researchers Lin William Cong, Xi Li, Ke Tang and Yang Yang examined a total of 29 cryptocurrency exchanges for behavioral manipulations, including regulated market leaders such as Bitstamp, Coinbase and Gemini, but also popular, unregulated exchanges such as Binance, Bittrex and Bitfinex, as well as lesser-known competitors such as DigiFinex and Gate.io.

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trillion dollar difference

The researchers concluded that more than 70 percent of the trading volume on the investigated unregulated exchanges was due to so-called wash trades, i.e. transactions where a market participant sells a similar asset and buys it back again. Often these are bots and not actual traders. Possible reasons for this procedure could be the artificial increase in trading volume, commission payments or tax benefits. The paper’s authors estimate that these wash trades accounted for more than $4.5 trillion in trading volume in the spot market and more than $1.5 trillion in derivatives markets in the first quarter of 2020 alone.

Exchanges rise in comparative rankings through wash trades

According to the NBER researchers, if such wash trades occur more frequently on crypto exchanges, they will rise in rankings from providers such as CoinMarketCap, which classify the trading venues based on various criteria such as data traffic, liquidity, trading volume and seriousness. In the example of CoinMarketCap, providers are said to increase by about 46 places through wash trades. In addition, a short-term positive correlation was observed with the prices of the traded cryptocurrencies on trading platforms.

Better known crypto exchanges are less affected by wash trades

Ultimately, however, the researchers concluded that fewer wash trades tended to be conducted on more established crypto exchanges with a large number of users, without naming specific trading venues. On the other hand, laundry merchants can offer at least short-term incentives to merchant providers that are less well-known. This allows them to rise in online rankings without attracting too much attention, according to the researchers.

The Forbes study comes to a similar conclusion

The NBER study is reminiscent of an analysis by the business magazine “Forbes” from August 2022. At that time, 157 crypto exchanges were investigated for their transactions. The result of Forbes analyst Javier Paz: “More than half of the reported trading volume is probably fake or not economic.” The exchanges put Bitcoin trading volume on June 14, 2022 at approximately US$262 billion, but Paz pegged the actual volume at US$128 billion, 51 percent less than the data from the trading venues. The strategist also blamed the laundry merchants for the distortions.

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