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CFTC’s Targeting of DeFi Justified as Wash Trading Runs Rampant: Report

Published September 15, 2023 1:50 PM
Teuta Franjkovic
Published September 15, 2023 1:50 PM
Key Takeaways
  • Solidus estimates $2Bn in fraudulent cryptocurrency transactions in DeFii.
  • There are two main categories of DEX-based wash trading, accounting for $960 million and $1.1 billion.
  • Solidus draws attention to the instance of SHIBFARM, a token that makes use of dishonest strategies.

The Commodity Futures Trading Commission (CFTC) has tightened its regulatory focus on digital asset companies operating in the United States as decentralized finance (DeFi) gains popularity and prominence.

In his recent speech , Ian McGinley, the director of enforcement for the CFTC, stated that his organization’s fight against DeFi was “only getting started.”

He referred to DeFi as “the latest frontier” of regulatory enforcement and claimed that the OokiDAO victory had bolstered the CFTC’s efforts in the area.

The CFTC revealed on Thursday, September 7, that accusations against the owners of three DeFi protocols had been resolved. Opyn, ZeroEx, and Deridex are required to pay fines of $250,000, $200,000, and $100,000, respectively, under the settlements.

In addition, they have committed to stop breaking CFTC rules and the Commodity Exchange Act.

This is the obvious evidence that CFTC’s threats of “getting started” weren’t just an empty phrase.

Solidus Labs Unearths $2Bn in Wash Trades on DEXes

Since the Commodity Futures Trading Commission brought enforcement charges against the aforementioned three firms in September, decentralized-finance services have drawn increased attention.

According to a recent report  by researcher Solidus Labs, token price manipulation is widespread on Ethereum-based decentralized exchanges, where so-called wash trading has included at least $2 billion worth of cryptocurrencies since September 2020.

Token issuers and other parties may sell a currency to themselves in order to increase its price and trading volume, making it a strong contender for listing on centralized exchanges. Wash trading is a type of market price manipulation where a trader buys and sells a security.

Studying wash trading on three decentralized exchanges (DEXes), where users can transact directly with one another, Solidus discovered  that liquidity providers have influenced prices and volumes of more than 20,000 tokens since September 2020.

According to the analysis , wash trading accounted for 13% of the overall trading volumes in 67% of the roughly 30,000 liquidity pools in Solidus’ sample that were operated by liquidity providers on decentralized exchanges.

According, “We were looking at 1% of all pools,” said  Will Kueshner, a researcher at Solidus, in an interview. “Probably wash trading on dexes has a true magnitude that is an order of magnitude larger.”

As per Solidus, wash trading on Ethereum is expensive, with each transaction probably costing between $1 and $5. Profits, though, can make up for it.

The volume traded on Ethereum-based DEXs over the last week was around $5.86 billion, according to the most recent DeFiLlama data .

dex volume ETH

For instance, Solidus revealed that the deployer of the Shibafarm token gained almost $2 million in profits over the course of two hours in May 2021 by taking two-sided liquidity out of the pool.

PayPal USD
Credit: CoinMarketCap

According to the Solidus research , when Shibafarm launched in 2021, its deployer utilized software that prevented customers from selling the coin. According to Solidus, the deployer also set up 25 allegedly unique parties that carried out more than 30 token swaps, accounting for more than 40% of its trading volume and driving up the price of Shibafarm in the process.

Credit: Shibarium

The issue of who is responsible for wash trade identification and prevention in DeFi is still up for debate. The Solidus report, however, underscores the necessity of fairer markets for long-term development.

A fair and transparent marketplace is essential, said  Blockchain Intelligence Group’s Timothy Cradle, Director of Regulatory Affairs:

“There’s competition in every industry. That’s not an excuse to go out and do wash trading and try to make your exchange look more liquid than it actually is, especially when you’re dealing with cryptocurrency.”

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