Recently, the Ontario Securities Commission (‘OSC’) accused CoinSquare, a Canadian crypto-trading platform for “Wash-Trading”. According to the OSC, Coinsquare wash traded , between July 17, 2018 and December 4, 2019, when approximately 840,000 wash trades were conducted on the platform with an aggregate value of around 590,000 Bitcoin (worth over 5.4 billion USD). A public hearing before the OSC Secretary under Sections 127 and 127.1 of the Securities Act, RSO 1990, c S.5 has been held in order to decide a course of action, with a probable outcome including a settlement between the two parties in the furtherance of public interest.
This brings us to the question: What is wash-trading, and why is it such a grave offence?
To spell it out in simple words: When an entity purchases and sells a particular cryptocurrency repeatedly, with the intention of manipulating the market activity, by increasing the number of cryptocurrencies being traded, is said to practice a wash trade. The asset is bought and sold off immediately, which would show the ledger to be without any profit or loss points, but it would increase the volume (the volume is dependent on the number of transactions involved) of the asset in the eyes of the market, influencing the overall activity of trading in cryptocurrencies. As cryptocurrency trading takes place in the form of trading-pairs on a 24-hour window, an example of wash trading could be the platform showing the trading volume to be 80 USD, but the actual value would just be 30 USD. According to a report presented to the U.S. Securities and Exchange Commission (‘US SEC’), between 67% and 95% of Bitcoin exchange volume is faked through wash trading on various trading platforms.
Though this practice has been banned in traditional stock exchanges of the United States (as per the Commodities Exchange Act,1936), banning it outright on a cryptocurrency platform is a difficult task owing to fact that crypto exchanges can take place from multiple accounts and servers. With large amounts of algorithmic trading processes and ‘trading bots’being used in the process in order to execute such wash trades, it makes it cumbersome for platforms to track down such activity. Apart from the display of high trading volumes, wash trading also helps cryptocurrencies to get listed on charts of various exchanges, and escape the cost of heavy listing fees in the process. An added danger is in terms of new entrants in the crypto market that expect quick traction due to the existing competition.
To this date, regulators and platforms are trying to find a solution to counter this situation. Reports and figures have already been submitted to the US SEC, and methods are being adopted in order to curb such practices. It shall be interesting to look at the course of action the Canadian regulators take in this direction, in order to strengthen their cryptocurrency exchange framework to be more transparent and accountable.
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