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How "wash trading" is perpetuating crypto fraud


People obsessed with cryptocurrency got some news from a recent headline in Forbes, which said "More Than Half Of All Bitcoin Trades Are Fake." Paddy Hirsch and Wailin Wong from NPR's podcast The Indicator say the culprit may be an age-old practice used to manipulate markets.

PADDY HIRSCH, BYLINE: There are a lot of ways that unscrupulous traders can generate this kind of fake volume. But one of the most prevalent is something called wash trading. This was a kind of a new term for us, not surprisingly, because wash trading has actually been banned on regulated market exchanges in the United States since 1936. But what is wash trading exactly? Kim Grauer is director of research at Chainalysis, which watches the crypto space.

KIM GRAUER: Wash trading is a trading strategy in which the buyer and the seller is effectively on both sides of the trade, and a person will essentially sell themselves an asset to create the illusion that a particular asset is trading far more than it actually is.

HIRSCH: For example, imagine you're a writer who has self-published a novel. You really, really want to get your book out to a bestseller list because people who read novels often use bestseller lists as a guide to what they should buy next.

WAILIN WONG, BYLINE: So to do this, you create a bunch of bogus accounts on Amazon. You allocate a bunch of money to each one, and you use those accounts to buy 100,000 of your e-books. Presto, your book goes to No. 1 on the bestseller list. And now people are interested.

HIRSCH: And with a bit of luck, they also start buying, which is where you start to make money. But your original investment - that money that you spent to buy all those books from yourself - goes right back into your pocket. It is, as the phrase goes, a wash.

WONG: And while we couldn't confirm the claims that Forbes makes about the volume of fake trading in bitcoin specifically, Kim Grauer at Chainalysis confirms that the crypto-verse is awash in wash trading.

HIRSCH: Now, Kim says that most wash traders in the crypto-verse aren't making huge amounts of money. Many aren't making money at all. But some are raking it in. And that creates a big incentive for unscrupulous traders hoping to take advantage of an effectively unregulated market.

GRAUER: This is all a legal gray area that we're all trying to figure out how this should be regulated and what's illegal, and is this just someone being smart and taking advantage of a platform effectively, or is this something that we need to kind of come down with a hammer and stamp out that activity?

HIRSCH: The government says that all wash trading, wherever it happens, is illegal. The problem is that no one has really yet determined what crypto assets actually are and who has jurisdiction over them.

WONG: Is bitcoin a security and therefore covered by the SEC? Are NFTs commodities, in which case they'd be regulated by the CFTC? Until the government decides how to classify crypto assets, it's hard for regulators to police the way they're traded.

HIRSCH: Yeah. And Kim says that everyone in the crypto-verse is keen to find a regulatory solution that protects investors without stifling innovation. She says in some ways, crypto is helped by the fact that everything is based on the blockchain, which makes trades transparent. But that also means being able to see every bad act.

GRAUER: I can tell you how much wash trading was happening today on certain platforms. And I think long term, that's going to force cryptocurrency to clear a higher hurdle of legitimacy than the traditional financial system because of all of the attention that cryptocurrency crime has.

WONG: One example of that attention - that Forbes report that claims 50% of all bitcoin trades are fake.

Wailin Wong.

HIRSCH: Paddy Hirsch, NPR News.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.

Paddy Hirsch
Wailin Wong
Wailin Wong is a long-time business and economics journalist who's reported from a Chilean mountaintop, an embalming fluid factory and lots of places in between. She is a host of The Indicator from Planet Money. Previously, she launched and co-hosted two branded podcasts for a software company and covered tech and startups for the Chicago Tribune. Wailin started her career as a correspondent for Dow Jones Newswires in Buenos Aires. In her spare time, she plays violin in one of the oldest community orchestras in the U.S.