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Washed Out:
Phony Crypto Volume

Busy SEC...
The Securities Exchange Commission (SEC) has been very busy this year. In March alone, the agency brought 15 securities-related charges, not including crypto-related cases. Charges filed by the SEC addressed a wide range of market misconduct, including insider trading, filing misleading disclosures, fraud, misappropriation of investor funds, failing to disclose fees, providing unregistered financial services, improper professional conduct, and accounting fraud. No size of firm seems to escape the SEC’s purview. Entities charged in 2023 range from individuals, hedge funds, small and medium finance firms, as well as large companies like Activision Blizzard, Betterment, Bloomberg, and Merrill Lynch. Other SEC charges levied this year include a former McDonald's CEO, a former BlackRock portfolio manager, NBA Hall of Famer Paul Pierce, and The Church of Jesus Christ of Latter-day Saints.

Born in the midst of the Great Recession and intended to exist outside traditional financial systems, distrust of markets and institutions seems to permeate the crypto ethos. For example, in early bitcoin discussion forums, the stock market was called a “scam” and a “Ponzi scheme”. Such mistrust of capital markets seems commonplace among crypto-enthusiasts, who may perceive market manipulation and fraud as not only present within established markets, but as pervasive and commonplace. Considering the anti-market sentiment that is foundational to the crypto thesis, it may be highly ironic that fraudulent activity is perhaps even more common within crypto assets than traditional securities.

Crypto Nonimmune
Despite being intended to eliminate risks within the financial system, crypto assets have been used to perpetrate a lengthy list of fraudulent and manipulative schemes and scams. So far in 2023, the SEC has announced 11 crypto-related charges for alleged offenses ranging from compliance and registration failures, manipulation, Ponzi schemes, and other frauds. Though manipulation does happen in established stock markets, researchers have found that crypto markets are “plagued” by “pervasive” pump-and-dump (P&D) manipulation that is “unprecedented in modern markets” and “exponentially higher” than established equity markets. While around a few hundred P&Ds happen in a 10 year period in penny stocks, researchers found 300 crypto P&Ds within a few months. The SEC has made five Ponzi-scheme charges since 2022, three of which were crypto-related. An area of Brazil has had so many crypto-pyramid schemes, it has been referred to as the “new Egypt”.

Wash Trades
Not to be confused with money laundering or a wash sale, wash trading is a market manipulation tactic. While a wash sale refers to the tax treatment of a security sold at a loss 30 days before or after buying the same or similar security, wash trading is done to give the false impression of active transactions in an otherwise illiquid market. Wash trades, also called matched trades, involve trading an asset between accounts to give the appearance of demand, when in reality it is only one person or colluding people sending the assets back and forth between accounts they own themselves. The false illusion of liquidity can serve to lure buyers who would otherwise not enter an illiquid market, which may artificially inflate the asset's price. In addition to the SEC, the Commodity Futures Trading Commission (CFTC) also monitors wash trading in stock futures markets. Between the SEC and the CFTC, at least seven charges have been made alleging market manipulation through wash trading in established equity markets since 2019. Though wash trading does happen in established stock markets, it may be dwarfed by the potential amount of wash trades in crypto markets.

Crypto Washout
A study by the National Bureau of Economic Research found that wash trading on unregulated crypto exchanges averaged over 70% of the reported volume. Both the SEC and the CFTC have been working to reduce wash trading manipulation in crypto markets. Last month, the SEC announced multiple charges against crypto asset entrepreneur Justin Sun, including that Sun manipulated the market for its crypto asset Tronix (TRX) through directing employees to make more than 600,000 wash trades; artificially inflating TRX’s apparent trading volume. While using wash trades as well as paying celebrities including Lindsay Lohan, Soulja Boy, Kendra Lust, Lil Yachty, and Akon to tout TRX (who were all also charged with promoting a security without disclosing they had been paid to do so), Sun sold TRX into the secondary market, generating $31 million in proceeds.

Digital Rinse
In January, the SEC and CFTC both charged Avraham Eisenberg with using wash trades to manipulate and artificially inflate the price of the MNGO token traded on Mango Markets to borrow and then withdraw nearly all available assets from Mango Markets, leaving the platform holding the bag when the MNGO price fell to its pre-manipulation level. In Sep 2022, the SEC charged two companies and their CEOs for manipulating the trading volume and price of a crypto asset called “Hydro” through wash trades, yielding more than $2 million in profits for the perpetrators after selling Hydro into the artificially inflated market. In March 2021, the CFTC settled charges against digital asset exchange Coinbase alleging the use of wash trades on its platform to artificially inflate transaction volumes and give the false appearance of increased liquidity, while also making a charge related to wash trades by a former employee to give the misleading appearance of trading interest in Litecoin.

Regulation Resistance…
Similar to a wash trade, issuers of crypto assets have been accused of buying their own token on the secondary market to push up the price of the asset. Bankrupt crypto exchange Celsius has been accused of buying its own CEL token to prop up its price, benefiting company directors and insiders who sold millions of dollars worth of CEL. After the stunning collapse of crypto exchange FTX, regulators alleged that Sam Bankman-Fried and Caroline Ellison schemed to manipulate FTX’s proprietary token FTT by purchasing large quantities on the open market to prop up its price, using the inflated value to boost its balance sheet. Unlike share buybacks by public companies which are announced in advance along with details of dollar amounts and time frames, the charges against the crypto firms allege the buying was done to give the false appearance of demand from the open market. Despite the tsunami of fraudulent activity and a market framework filled with conflicts of interest that regulators have worked to restrict or reduce in established equity markets, the crypto industry is largely resistant to regulations. This may be especially ironic considering that enhancing trust in markets was central to crypto’s purpose for being created.

April 19, 2023


Cong, L. W.; Li, X.; Tang, K.; & Yang, Y. (2022). Crypto Wash Trading. National Bureau of Economic Research. Working paper 30783. DOI 10.3386/w30783

Dhawan, A.; & Putnins, T. J. (2021). A New Wolf in Town? Pump-and-Dump Manipulation in Cryptocurrency Markets. Review of Finance.

Gandal, N.; Hamrick, J. T.; Moore, T. W.; & Oberman, T. (2017). Price Manipulation in the Bitcoin Ecosystem. Journal of Monetary Economics 95 (2018)

Li, T.; Shin, D.; & Wang, B. (2019). Cryptocurrency Pump-and-Dump Schemes. Corporate Governance & Finance eJournal.

Williams-Grut, O. (August 13, 2020). Level of Cryptocurrency Scams 'Unprecedented in Modern Markets'. Yahoo Finance UK

Markets Demystified is published the first and third Wednesdays of each month, and explores how stock market investing can relate to personal finance.

Thanks for Reading!

Jonathon Oden
Owner | Aesop Advisor LLC

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