A total of seven cryptocurrency exchanges have contracted with Nasdaq to use its surveillance technology. The technology, which has various products including SMARTS (which was adopted by Gemini), enables Bitcoin exchanges to identify fraudulent trading patterns.
According to Forbes writer Michael del Castillo, Bitcoin exchanges must have more than enough capital to cover the steep fees Nasdaq charges to license its technology. Nasdaq conducts a means test which focuses on the backgrounds of exchange executives as well as practices within them. Exchanges must list reputable tokens and must have a solid process through which they add them.
Only two exchanges have publicly revealed that they are using the Nasdaq technology. According to a Nasdaq exec, five more have passed the test and contracted to use the software. Gemini and SBI Virtual Currency both use Nasdaq’s program to monitor the use of their exchanges. The same tech is used by Nasdaq to assure investors that liquidity and volume of traditional assets are legitimate.
The question of honest volume has repeatedly come up over time in the cryptocurrency space in recent months. An in-depth study of volume reported by South Korea’s Bithumb found that the exchange was likely pumping its numbers.
Uncovered patterns show Bithumb would do as much as 95% of its volume in a space of two hours over a 24-hour trading day. Some tokens, like WaltonChain, were pumped to incredible heights this way. The metric of volume done on an exchange is one that plays an important role at various ranking sites and also helps traders determine where to do business. Exchanges with more volume have greater liquidity. The prices reflect real sentiments. That is, unless they’re falsifying said volume.
This reporter has been told by several experienced traders and industry insiders that nearly every Asian exchange fluffs its volume numbers. One researcher has even concluded that it’s impossible for exchanges not to be faking volume and even prices – the business model is so hard to profit from, it wouldn’t make sense otherwise. The rapidity with which exchanges have to respond to declining interest in cryptocurrency demonstrates they’re not making enough, after all. A well-tuned business model will give a company reserves to weather long periods of poor performance.
Gemini is a hyper-regulated exchange. They’re so regulator-friendly that they advertise based on their status. They are far from the most popular exchange. Assuming their volume is honest (no indications to the contrary), they rank 65th by adjusted volume at press time.
Binance is king and has been since it took the scene by storm. It likely would not pass the means test in terms of the tokens it lists – mostly anything the customers want. Binance is more likely to create their own monitoring product than outsource the job, however. More than once, they have acted to ensure justice in the case of stolen funds or questionable business practices.
As the Bitcoin industry grows up and goes mainstream, it will be necessary that Nasdaq’s surveillance software or something like it is operational on crypto markets. Such things ensure that everyone’s playing by the same rules.
However, as del Castillo writes:
In crypto, innovation would come not from top down but from the grassroots. While Nasdaq has shown a willingness to work with some unusual clients in the crypto space, the ones we know about support what these questions reveal about Nasdaq’s interest in working with proven entities, something other regulated exchanges and technology providers will likely follow.
Indeed. An innovative alternative to Nasdaq technology may be in order. Companies like Chainalysis and Elementus already work in this space. Blockchains are about transparency. A crypto-native solution would probably gain more favor among crypto exchanges.
Questionable exchanges — along with hacks, theft, and usability problems — are still chief among the problems that crypto faces in gaining mass adoption.
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