The Blockchain Transparency Institute, making a name for itself by compiling an advisory list of cryptocurrency exchanges, recently released their December 2018 research indicating that many exchanges are faking their trading volume by using automated programs (bots) to execute “wash trades.”

In a stunning finding they discovered that 23 of the 25 trading-pairs examined were subject to extensive fraud.

Blockchain Transparency Institute Top 25 Trading Pair Review (Dec. 2018)

What is a Wash Trade?

Wash trading is a process whereby a trader buys and sells a security for the express purpose of feeding misleading information to the market. In some situations, wash trades are executed by a trader and a broker who are colluding with each other, and other times wash trades are executed by investors acting as both the buyer and the seller of the security. Wash trading is illegal under U.S. law, and the IRS bars taxpayers from deducting losses that result from wash trades from their taxable income. — Investopedia

An example of a wash trade is having account A set a Buy for 5 BTC @ $3,300 while Account B sets a Sell for 5 BTC @ $3,300 and once the trade settles they reverse roles and B sells back to A for virtually the same price. The overall amount spent by the colluding accounts is zero or near-zero (depending on fees).

No actual market position was taken by either party, and it all comes out as a wash.

But to market makers and takers participating legitimately in the cryptocurrency exchange it appears that the trading pair (such as BTC to USD) is far more active than it is.

This is especially dangerous for traders with new tokens being released on disreputable exchanges who’re pumping their volume in this manner, since it creates artificial interest in a new token that might not otherwise exist. Once the fake trading volume bubble pops the victims of the scam are left with devalued coins/tokens.

Wash trading is a form of market manipulation and is illegal. [Reddy v. CFTC, 191 F.3d 109 (2d Cir. 1999)]

In close timing with the release of BTI’s report the founder of OKEx has been detained for questioning in relation to potential fraud.

Motivations

BTI notes that “Listing Fees are Big Business” — that is, when a new token or coin is requested to be added to a given exchange there’s often a payment involved for the privilege.

By faking their trading volume to be as big as their legitimate competitors these exchanges have a chance to set their own prices for listing a new crypto-asset.

This adds up to an estimated $100,000,000 stolen in 2018 from the crypto ecosystem.. and with over 50 exchanges wash trading over 95% of their volumes, this is a 500K a year scheme, with some exchanges making over one million dollars this year just from collecting these fees.

Who’s Legit?

The Blockchain Transparency Institute compiled a list of exchanges ranked by actual trade volume who weren’t inflating their stats with their own trading bots.

Exchanges like Binance, Bitfinex, Coinbase, and Kraken all lead the top of the December 2018 rankings.

About the Blockchain Transparency Institute

The organization itself is a bit of a mystery: no registered address, domain privacy, a Let’s Encrypt TLS certificate, and no list of names or contacts.

Who exactly are the BTI?

How do we trust their methodologies? They admit they can’t share for fear of making it too easy for their tools to be defeated.

Summary