Exchange: bad news for BTC and crypto

Crypto exchanges continue to be the weak point in this sector at the moment: negative news for Bitcoin (BTC) and cryptocurrencies regarding these platforms. 

Crypto news: Bitcoin (BTC) and money laundering

The latest in the news concerns money laundering.

It is a lengthy paper by NBER titled Crypto Wash Trading, and devoted precisely to cryptocurrency exchanges related to money laundering. 

The NBER, or National Bureau of Economic Research, is a private, nonpartisan US organization that does analysis on major economic issues. 

It is based in Cambridge, Massachusetts, which is where the world-famous MIT (Massachusetts Institute of Technology) is located, and consists of a network of nearly 1,700 economists who hold primary positions at North American colleges and universities. 

Its research is therefore academic, and should be independent, although it is subsidized also by government agencies, as well as private foundations, corporations and individuals. 

Crypto Wash Trading research

The Crypto Wash Trading research was conducted by Lin William Cong, Xi Li, Ke Tang, and Yang Yang, and was co-funded by the Ewing Marion Kauffman Foundation and China’s National Science Foundation. 

The authors are from Cornell University, Tsinghua University, and the SC Johnson College of Business. 

It was conducted on 29 crypto exchanges with systematic testing using robust statistical and behavioral models to examine trading and detect fake transactions. The exchanges examined include Binance, Coinbase, Bitstamp, Gemini, Bittrex, Bitfinex, HitBTC, Huobi, KuCoin, Liquid, Okex, Poloniex and others. 

The exchanges analyzed are the regulated ones, because they exhibit consistent patterns also observed in traditional financial markets. In this way, detecting anomalies uncovers possible manipulation. 

The problem is that on average more than 70% of the volume of these exchanges was found to be anomalous. The authors of the analysis claim that there would be trillions of dollars a year of fictitious volume created to improve the ranking of exchanges and temporarily distort prices. 

On some exchanges, even the trading volume related to wash trading would reach up to 80%, so that in total in the first quarter of 2020 alone it would be $4.5 trillion in spot markets and more than $1.5 trillion in derivatives markets. 

The baseline data therefore refer to 2020, which is a year whose trading volumes were particularly low, especially in the first three quarters. 

However, it is rather clear from the reasons listed by the authors as the main causes of these anomalies that only some of them are actually related to money laundering. 

In other words, it does not appear that all of these fictitious volumes are actually generated by money laundering activities, but instead are mainly generated by attempts to manipulate data about the exchanges themselves or cryptocurrency prices. 

For example, the report explicitly mentions the procedure of simultaneously selling and buying the same quantities of the same asset just to create artificial exchanges to distort price, volume, and volatility. 

Another strange figure is the volume of regulated exchanges. In fact, according to the report, until the middle of this year, only less than 3% of the total cryptocurrency spot trading volume would still come from regulated exchanges such as Coinbase, BitStamp, Gemini, BitFlyer, and so on. This means that the world’s largest exchanges, including Binance, are considered unregulated, despite the fact that in some countries they operate in accordance with the law and only after obtaining special authorizations or licenses. 

One explanation could be related to the Chinese market, which in theory should not even exist due to the ban on crypto trading, but instead most likely continues to be there and has significant volumes. 

Crypto and Bitcoin (BTC) news: the link to regulated exchanges

The report did not look at FTX, although in theory, it was one of those exchanges that could be considered regulated. 

FTX was based in the Bahamas, and thus was regulated by Bahamian authorities, but it operated primarily in the US under regular licenses, and in fact under the theoretical supervision of US government agencies. In fact, both the SEC and CFTC later sued it for rule violations once it collapsed. 

This gives a good idea of how poorly exchanges that are considered regulated can operate, to the extent that another of the biggest crypto failures of 2022, Celsius, was involved with a regulated company, albeit not an exchange. 

And while even regulated crypto exchanges can easily become tainted with unethical, if not outright illegal, behavior, it is easy to imagine how much can happen on unregulated ones. 

It is worth adding that decentralized exchanges that are totally unregulated by law still register very small volumes, compared to those occurring on centralized exchanges, especially when those on crypto derivatives are also taken into account. 

The sub-sector of crypto exchanges remains one of the most critical areas in the crypto industry right now, mainly because of the often non-transparent and manipulated dynamics that probably still dominate its operation.