The Department of Justice (DoJ)
and the Commodities Futures Trading Commission (CFTC) have
opened up an investigation into price manipulation of
cryptocurrencies, amid allegations that the practice is rife.
Self-regulation, which has been used in other markets to solve
this kind of problem, could be the answer for
Regulators are concerned that investors
are opening up transactions to encourage others to either buy
or sell a coin and then refuse to complete the transaction, a
practice also known as spoofing. There are also concerns that
wash trading and so-called pump and dump schemes are taking
These practices are banned in conventional
financial markets but given the cryptocurrency market is
largely unregulated, investors may have been getting away with
these illegal practices for some time. The move confirms that
authorities are viewing cryptocurrencies in the same light as
traditional financial investments and the same market rules
"Exchanges are the first
line of defence and are capable of monitoring
Ashurst partner Tara Waters, the regulatory landscape
remains uncertain and this has opened the door for people to
"Exchanges are the first line of defence
and are capable of monitoring trades," Waters said. "We know
traditional platforms utilise monitoring teams and technologies
and I see no reason why a crypto exchange that wants to be seen
as trustworthy and credible should not be taking active steps
to limit abuses."
Exchanges in securities or in derivatives
markets, and particularly the futures market, are often bound
to a self-regulatory organisation, effectively to police an
exchange. These have an obligation to report any suspicious
behaviour directly to the regulator and in the event that
illegal activity is taking place, exchanges may have to suspend
The DoJ and the CFTC have
launched an investigation into price manipulation of
cryptocurrencies, concerning spoofing, pump and dump and wash
Self-regulation has been used in
other markets to solve similar problems and could be
effective for the crypto market. The Winklevoss twins are
planning a new Virtual Commodity Association which would
create new global standards;
The crypto regulatory landscape
remains unclear, with uncertainty about the status of Ripple
Some exchanges have been accused
of falsifying trade volume, slippage and fuelling a bitcoin
The Winklevoss twins, who were involved with the creation of
Facebook and founders of the Gemini exchange, intend to create
the Virtual Commodity Association –
cryptocurrency’s own self-regulatory organisation
- which would develop industry standards and work with the CFTC
to prevent fraud and other illicit activity.
CFTC commissioner Brian Quintenz said in
March that a private cryptocurrency self-regulatory
organisation should be adopted that could help to create global
industry standards and would also bring cryptocurrency
exchanges in line with conventional exchanges.
Bitcoin and other altcoins are considered
commodities and within the CFTC’s jurisdiction.
The regulator is able to issue trading bans, take out
injunctive relief and take back any profits made. But problems
arise when the many regulators in the US believe that they do
not have mandate to enforce against bad actors within the
The longstanding debate on whether a token
is a security or a commodity is confusing matters further and
clarification is needed soon so investors and exchanges know
Ripple has been subject to a lawsuit filed
in the Superior Court of California claiming that the company
used the sale of its XRP token to fund its operations of the
XRP ecosystem, a blockchain favoured by financial institutions.
This would fulfil the longstanding Howey test’s
definition of a security. The decision as to whether Ripple has
been offering an unregistered security would impact any
exchange that sold the coin, including all non-US exchanges
across the world.
Waters believes that clarity rather than
new regulation is necessary. "For the time being the existing
laws and regulations seem to cover the crypto market
sufficiently, although increased clarity and guidance as to
their application are welcomed," she said.
Some much needed clarity is slowly being
offered. The Securities and Exchange Commission declared
Ethereum, the world’s second biggest
cryptocurrency by market cap, not to be a security last month.
In the ruling, William Hinman, director of the
SEC’s division of corporate finance, said when the
efforts of the third party are no longer a key factor for
determining the enterprise’s success, material
information asymmetries recede. This means the ability to
identify an issuer or promoter to make the required disclosures
becomes difficult and less significant.
SEC chairman Jay Clayton said last month
that bitcoin is not a security as it acts as a replacement for
sovereign currencies. The same would apply for other altcoins,
those issued on the bitcoin blockchain.
The original issuers of Ripple held onto a
large proportion of the coins ever since it was first issued.
As Ripple depreciates in value, it is believed that it could
benefit the original holders of Ripple.
The SEC’s suspicions rise
when issuers retain more of the coins following its issuance.
Often founders of a token or coin retain a significant number
of coins, but it is more like 30% to 40%.
"Manipulation appears to be quite
rampant," according to a CEO of a fintech publication.
"However, exchanges are certainly working to reduce the
pervasiveness of price manipulation and ability for individuals
to engage in manipulative activities."
Earlier this year, accusations were
levelled at cryptocurrency Tether, which is said to be pegged
to the dollar, for manipulating the bitcoin market.
Inconsistent pricing data suggests that Tether was used to buy
bitcoin during late 2017 and then more Tether was issued after
Bitcoin’s price dipped. This would be then used to
buy more bitcoin, fuelling a bubble.
Some exchanges have also been accused of
falsifying trade volume and what crypto investor Sylvain Ribes
refers to as slippage – the percentage change between
the observed mid-change price and the lowest price that one
must consent to sell the asset.
"It is hard to say it is more widespread
– alleged fraud and manipulation of currencies is not
new, and is already illegal," Adam
US dispute resolution
practice said. "In the forex and other matters, the DoJ
and CFTC continue to demonstrate their resolve, but if there is
wrongdoing in the crypto market, the DoJ and CFTC will pursue
and prosecute it."
The investigation is ongoing, but whatever
comes out of the investigation, self-regulation could be
necessary to introduce new global standards and provide more
protection to the investor. This becomes even more crucial if
clarity from regulators is not offered soon.
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