Washington College of Law Professor Gerard Comizio said that due to a lack of overarching federal regulation of cryptocurrency, data on wash trading remains indeterminate. However, some reports suggest that it occurs. Comizio made this statement on October 9 following reports of wash trading on Crypto.com.
"While there is no determinative data on this issue since crypto exchanges have no consolidated federal regulation or oversight as trading exchanges, some recent studies conclude that wash trading occurs in the crypto trading markets, much as securities and commodity trading has raised such issues," said Comizio. "One question in asserting crypto wash trading is whether it makes sense for the wash trader. One premise in crypto wash trading is that a sale and repurchase would open the trader to triggering federal tax liability for selling a crypto asset and then, in addition paying more for the same crypto as the price is driven up. Buying options and futures to hedge such purchases and sales would appear to be necessary to offset costs (including exchange trading fees for each transaction) of executing such transactions, and would, perhaps more importantly implicate the jurisdiction over crypto derivatives instrument such as bitcoin futures."
According to BlockTribune, an analysis was conducted last month using Price-Volume Correlation (CORR) and Trading Volume Variance (VAR) on Crypto.com to evaluate the authenticity of trading activities. The analysis adhered to methodologies outlined in a U.S. Securities and Exchange Commission (SEC) presentation authored by Bitwise. BlockTribune concluded that over 70% of trading activity on the platform for popular pairs such as ETH/USD, ETH/USDT, BTC/USD, and BTC/USDT might lack economic value.
BlockTribune further analyzed the CORR and VAR for these popular trading pairs on Crypto.com and compared them with their trading volumes on peer exchanges. On August 20, for instance, Crypto.com's trading volume for BTC/USDT was three times larger than Binance's volume for the same pair, yet the CORR and VAR values were significantly lower on Crypto.com. A low correlation between trading volume and price fluctuation suggests that actual market sentiment may not be accurately represented.
Wash trading is described by dYdX as a market manipulation tactic where traders artificially inflate an asset's value by trading between multiple accounts or wallets they control. This creates an illusion of high demand but can appear as genuine market activity to observers, potentially leading them to invest in the asset.
In October, Crypto.com announced receiving a Wells notice from the SEC in August, indicating potential enforcement action, according to a press release. On October 8, Crypto.com filed a lawsuit against the SEC with the intention "to protect the future of the crypto industry in the U.S."
Comizio serves as associate director of the Business Law Program at Washington College of Law, focusing his teaching on banking and virtual currency law as well as financial institution regulation. In private practice, he has represented various financial entities including banks and crypto companies.
