Billionaire Mark Cuban believes that the old market manipulation tactic may be the next thing to shake up the cryptocurrency industry.
“I think the next potential implosion is detection and elimination Laundering deals on centralized exchanges,” the longtime cryptocurrency investor told TheStreet.
Washing trading is when a trader buys and sells the same financial asset multiple times to generate false volume and show that there is a high demand for the asset. This artificially inflated demand can induce other traders to invest real money in the asset.
Since increased demand usually leads to higher prices, investors can use this process as a sort of “pump and dump” scheme: when the price is as high as the investor thinks it can go, they can cash out and let it go. With an asset that loses its value.
While laundering trading has been illegal in traditional US financial markets for decades, cracking down in the cryptocurrency space is likely to be difficult.
Putting an exact number in cryptocurrency trading is more difficult than in traditional finance because the markets are so different and decentralized – Chen Arad, COO of SOLIDUS LABS
For example, bitcoin is traded on thousands of centralized, decentralized, regulated and unregulated platforms. This could create new opportunities for criminals to collude in exchanges and manipulate the market with new and sophisticated original cryptographic methods, Arad told CNBC Make It.
Up to this point, more than 50% of reported daily bitcoin transactions are likely to be fake, according to a recent Forbes analysis of 157 cryptocurrency exchanges worldwide. For the study, Forbes analyzed data from four crypto media companies — CoinGecko, Nomics, Messari, and CoinMarketCap — as well as several cryptocurrency exchanges.
While Cuban cautioned that he didn’t have any details to back up his predictions, he did point out that there are reportedly tens of millions of dollars worth of deals for digital tokens that have very little interest and he doesn’t see how these types of assets can be easily converted into cash.
Arad agrees that laundering is a major problem in the cryptocurrency market. “Without preventing laundering trading, cryptocurrencies will never reach their potential to enable safer and more accessible financial services,” he says.
Unfortunately, determining the wash trade yourself is not an easy task. Identifying market manipulation requires specialized technology and deep technical, financial and cryptographic knowledge, says Arad.
But it is important to note that the cryptocurrency industry has made a concerted effort to combat the problem over the years, he says.
“Most regulated exchanges have compliance and oversight teams that are larger than traditional finance and are led by veterans,” says Arad. “On exchanges that use market surveillance, the wash trade rate is often just a fraction of one percent.”
He says the best thing retail investors can do to protect themselves from falling prey to a money laundering scheme is to ensure they only trust regulated cryptocurrency platforms that use market surveillance technology to detect suspicious trading activity.
With info from CNBC Make it