The U.S. Securities and Exchange Commission (SEC) has accused Binance.US, the American arm of the global crypto exchange Binance, of inflating trading volumes by engaging in the illegal practice of wash trading.
What is Wash Trading?
In finance, wash trading involves trading an asset with oneself or an affiliate. The economic substance of these trades is often nonexistent, yet they can inflate both prices and trading volumes. While the U.S. outlawed wash trading for stocks and bonds nearly a century ago, concerns about its prevalence in crypto markets have surged, given trading volumes have become a crucial marketing point for crypto exchanges.
Binance.US in the Eye of the Storm
As per the allegations, Binance.US, since its launch in 2019, inflated trading volumes through a Swiss trading company called Sigma Chain, controlled by Binance’s Chief Executive, Changpeng Zhao. According to the SEC, on the day following the launch, wash trading between Sigma Chain accounts and accounts owned by Zhao and senior employees constituted nearly 70% of the trading volume for one token.
Binance.US vehemently denies these claims, stating that the allegations are based on a misunderstanding of the facts and a misapplication of the relevant law.
“We strongly believe that the SEC’s allegations regarding wash trading are entirely unfounded, and based on a fundamental misunderstanding of the facts and a misapplication of the relevant law,” a spokeswoman for Binance.US said.
A recent study scheduled to be published in the journal Management Science suggests that over 70% of trading volume on crypto exchanges may be due to wash trading. If true, this implies an industrywide issue that has far-reaching implications.
For context, the study estimated that wash trading would have created a fake volume of more than $6 trillion in the first quarter of 2020 alone. Meanwhile, the professors conducting the study didn’t analyze Binance’s U.S. arm due to its late 2019 launch but found that the parent Binance exchange engaged in wash trading for about 46% of its total volume.
The Fallout
The aftermath of the SEC lawsuit has been catastrophic for Binance.US. Its market share has plummeted to a little more than 1%, according to data provider Kaiko. Furthermore, amidst the pressure from federal investigations, several senior officials at Binance have tendered their resignations.
While the global exchange, Binance, continues to maintain a significant portion of the market share at 52%, down from 60% at the start of the year, its American counterpart faces a stormy journey ahead. With the Justice Department investigation in full swing, Binance.US braces itself for what may be a costly litigation process.
Source: https://coinpedia.org/news/binance-us-faces-sec-accusations-of-artificially-boosting-crypto-trading-volumes/