For the first time, a judge in South Korea has stepped forward and handed out sentences to two crypto executives for falsifying exchange volume reports and profiting from internal wash trades. The two executives hail from the Komid exchange in South Korea, although one individual is also the CEO of fledgling coin system by the name of Komodo. Per local reports:
Hyunsuk Choi, the CEO of Komodo, received a 3-year jail term, while Park, an executive at the exchange, was sentenced to 2 years on the 17th of January 2019.
There are a number of data aggregators in the crypto ecosphere that collect data online, real time and publish results for all to see. Coinmarketcap.com is often quoted for maintaining accurate records for coin values, rankings, and volume statistics. They, nor do others, act as industry auditors over the correctness of the reported data, which is uploaded by participating firms from their internal reporting systems.
The data is widely shared, cited, and definitely has an impact on the competitive dynamics of the industry. It is no surprise that reporting entities might engage in inflating their numbers to gain market share against their competitors, a claim that has been made for years, but which has been very difficult to detect. Sadly, there are even consulting firms that will assist exchanges in these unethical practices.
The preferred method to ramp up reported volumes is claimed to be “wash trading”. The practice is outlawed in the United States, but crypto rules and regulations across the globe have not conformed to this protective guideline. The practice involves selling at a loss and then re-buying the same item internally, thereby artificially inflating daily trading volume. If you are a bit crafty in the process, one can also generate huge profits at the expense of the market. Detection methods up until recently relied upon shifting pattern recognition, which is difficult to define and use as evidence of a crime.
Times, however, have changed. New algorithms have enabled detection on a much broader scale than ever before, such that, last December, the Blockchain Transparency Institute (BTI) published an eye-opening report that could not be ignored. Per the report:
Over 80% of the top 25 BTC pairs on Coinmarketcap is wash traded. Most of these pairs have an actual volume of less than 1% of the volume reported on Coinmarketcap. Of the top 25 BTC pairs crypto exchanges, only 2 were discovered not to be wash trading their volume: Binance and Bitfinex.
Industry supporters were quick to condemn the unethical and illegal practice and to demand that a platform cleansing effort commence. The practice is also damaging to any new blockchain development effort that is trying to get its token traded in a meaningful way. Another BTI report noted that new coin systems pay upwards on average of $50,000 to list on an exchange, while being overshadowed by inflated volumes from other players. BTI estimates that these listing fees could equate to as much as $100 million being diverted from necessary development efforts that might move the industry forward.
In the actual scam at Komid, Choi and Park set up five fake accounts, then ran as many as five million transactions through them, earning them a nice profit of $45 million, as well. When the sentences were handed out, the judge presiding over the case noted:
The crime has damaged customers’ confidence in the virtual currency exchange and has had a negative effect on the domestic virtual currency trading market.
Hopefully, this case will be the first of many to cleanse the practice of crypto wash trading.