Pumping and dumping in crypto markets
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Spend five minutes browsing cryptocurrency content on Telegram, the encrypted messaging app, and you’ll soon discover dozens of ‘pump and dump’ scams orchestrated with a brazenness that makes the Wolf of Wall Street look like a pussy cat.
The threads typically urge speculators to pile into one chosen cryptocurrency at a certain time, inflating the price. This sucks in other unwitting punters, driving the price up higher still, and at some point, the pumpers become dumpers and cash out rapidly.
“We guarantee you the x2 if everyone buys and promotes the coin. Never panic sell, trust us and we will take you to the moon,” one group called Crypto VIP Signals promises its 50,000 subscribers.
“Buy the f***ing dip! Make this pump great again!” another instructs its 25,000-strong community, without mincing its words.
Pump and dump schemes are just one example of market manipulation that is thought to be rife in loosely-regulated crypto land. Others include front-running, wash trading, which involves creating false volume by matching trades, and spoofing, where you place and then quickly cancel orders.
“[The market] is highly, highly, highly manipulated. The extent is truly humongous,” says Asaf Meir, a former software engineer at Goldman Sachs who has launched a startup called Solidus Labs to develop market surveillance tools specifically for crypto markets.
It's responding to demand, he says, as crypto firms realise that market manipulation is as big a worry for risk and compliance teams as money-laundering.
In many cases, dodgy behaviour can be facilitated by collusion over social media and messaging apps. In addition, crypto assets are held via electronic identities that in many cases allow traders to remain anonymous.
It is hard to get a precise sense of the scale of the problem as there is little data is available. Still, regulators’ ears have pricked up.
Last week, the Financial Stability Board, the group of policymakers and regulators that makes recommendations to the G20, said some crypto data on prices, trading volumes and volatility was unreliable due to manipulation.
Across the pond, the US Department of Justice and the Commodity Futures Trading Commission have announced a criminal investigation into possible cryptocurrency manipulation, and requested trading data from some large exchanges. It comes after several traditional US exchanges last year launched bitcoin futures, products that unlike the biggest cryptocurrency itself are directly regulated by US authorities.
The CFTC has even promised whistleblowers on pump-and-dump schemes that lead to “monetary sanctions of $1m or more” that they might be rewarded with between 10 and 30 per cent of the penalties. It’s little surprise then that crypto market surveillance is gaining traction.
Mr Meir of Solidus Labs says his firm is working on developing a product for market makers, hedge funds and brokerages. Meanwhile, a wave of cryptocurrency exchanges have also announced they are taking action.
Gemini, run by the Winklevoss twins of Facebook fame, said in April that it would use Nasdaq’s surveillance technology called Smarts.
Last week, UK exchange Coinfloor followed in the footsteps of US exchange Coinbase when it launched a partnership with Chicago’s Trading Technologies, a market surveillance company that has long offered its products to the traditional derivatives trading marketplace.
Obi Nwosu, Coinfloor’s chief executive, tells FintechFT that without moves to stamp out crypto manipulation, “you will eventually have a market which is not functioning well and it will end up like a ’tragedy of the commons’ scenario…damaging the market and potentially destroying it”.
But others are less open to the idea. In a snappish blog post, top 30 exchange Kraken said that being protected from market manipulation “doesn’t matter” to most crypto traders.
“It’s fair to say there’s a split,” Mr Nwosu explains. “If you’re quite short term in your focus you might not care about putting systems in place - unlike those with a long term view.”
Further fintech fascination
Millennials and their money The mobile payments revolution in China has happened with breathtaking speed and scale. In only five years it has transformed daily life in Chinese cities and also laid the foundations for the country’s mammoth financial tech industry, which last year generated revenues of Rmb654bn ($98bn), according to iResearch. Last year, the value of mobile payments in China overtook the worldwide totals of both Visa and Mastercard. Almost half the world’s digital payments in 2017 were made in China, through apps such as Alipay and WeChat, according to PwC research. This transformation has been spearheaded by millennials, who were the early adopters of mobile payments, but it has rapidly spread across generations. Read the full article and see the rest of the FT's Millennial moment series.
Big Brother’s back China’s authoritarian government is taking steps to create a “Big Brother” state, where artificial intelligence and facial recognition technology can be wielded to monitor citizens round the clock. The government says that by 2020, it wants to have a national video surveillance network that is “omnipresent, fully networked, always working and fully controllable”. AI technologies have already allowed Chinese companies to give consumers a social credit score, conferring wider benefits on those with high scores and penalising those with low ones. But there is concern it could be used for more sinister purposes - such as spying on political dissidents and persecuted minorities.
Default-to-default A wave of defaults has hit China’s $190bn peer-to-peer lending industry this year, as Beijing cracks down on debt and financial risk in the shadow-banking sector. About 150 online lending platforms have suffered “problems” since the beginning of June this year, data show, meaning investors have been unable to take out money, owners have run away or police have launched an investigation into a platform.
Bits and bobs
Compliance crunch Revolut has reported suspected money laundering on its digital payments system to the UK’s law enforcement authorities and financial regulator. The move calls into question whether the fast-growing digital payments provider, which is currently advertising for its third compliance head in the past year, can maintain strong enough defences against financial crime.
Over exposed Global banking standard-setters are examining how material banks’ exposure to “crypto-assets” is and considering introducing capital requirements. Such a move by Basel Committee on Banking Supervision could deter banks - who have already had to bolster their capital buffers post-crisis - from embracing cryptos. Meanwhile, the Financial Stability Board has published a framework for monitoring the risks from crypto-assets to financial stability.
Clones As part of a project on the future of banking, UBS has created an avatar clone of Swiss economist Daniel Kalt using the computer gaming industry’s latest animation techniques. Potentially exciting for banks keen to cut costs - but will “robo advisers” ever take off?
CryptoFA CFA Institute, the organisation that hands out the coveted “Chartered Financial Analyst” qualification to people who make it through 300 hours of study, is adding topics on cryptocurrencies and blockchain to its curriculum as of next year, Bloomberg reports.
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