1.What is cryptocurrency wash trading?
Wash trading is when a trader or investor buys and sells the same security multiple times in a short period of time in order to deceive other market participants in the price or liquidity of an asset.
As mentioned above, wash trading involves the sale and purchase of the same asset over a short period of time. To influence the trading activity and price of an asset, traders use wash trading as a means of market manipulation. Typically, one or more colluding agents conduct a series of transactions without regard to market risk, thereby leaving the hostile agents unchanged from their original positions.
In October 2021, Larva Labs’ NFT project Cryptopunks witnessed a similar “wash sale” activity on the Ethereum blockchain. The cryptocurrency “CryptoPunk 9998” was sold for 124,457 Ether (ETH). The ETH used to buy the NFT was transferred to the seller and then returned to the buyer to repay the loan used to buy digital blockchain artwork from Larva Labs — not only a flash loan, but a major NFT laundering.
A trader or company may engage in wash trading for various reasons. For example, the purpose may be to stimulate purchases to raise prices, or to encourage sales to lower prices. Traders can conduct wash sales, locking in capital losses before repurchasing assets on a cost-reduced basis, essentially seeking a tax refund.
2.How does shuffle trading work?
The intentions of the parties to the shuffle transaction and the outcome of the transaction allow the shuffle transaction to achieve its purpose.
A wash trade occurs when investors buy and sell tokens of the same asset at the same time. On the other hand, the definition of wash trading goes a step further and takes into account the purpose or intent of the investor and the outcome of the transaction.
The intention of the trader or investor should be related to wash trading and should buy or sell assets with common beneficial ownership within a short period of time. Beneficial ownership refers to accounts held by the same person or company.
Financial regulators may be interested in transactions between accounts with common beneficial ownership, as they may conceal wash trading activity. Still, wash trading doesn’t always involve real trading; it can also happen when investors and dealers ostensibly trade, but don’t exchange assets.
3.Why is shuffle trading illegal?
Traditional finance prohibits shuffle transactions. On the other hand, in the decentralized realm of non-fungible tokens (NFTs), the legality of shuffle transactions is yet to be determined.
Despite the lack of legislation and classification of NFTs, some governments have opposed the practice. South Korean cryptocurrency exchange Bithumb, for example, was accused in 2018 of condoning fake transactions worth more than $250 million.
On April 5, 2022, Bloomberg reported that data from NFT tracker CryptoSlam showed that on the NFT market called LooksRare, shuffled transactions accounted for 95% of the total trading volume, reaching $18 billion.
Although crypto shuffle trading is expressly prohibited in some jurisdictions, the decentralized structure of cryptocurrencies makes it difficult to track down criminals. Unlike traditional financial instruments such as stocks, blockchain-powered assets can be traded anonymously, leading to wash trading risks. This risk stems from misleading price and volume statistics and cannot be eliminated unless authorities decide which jurisdiction is responsible for regulating cryptocurrencies.
4.How are NFTs used to launder money?
NFT crimes such as money laundering and shuffle transaction scams occur when NFT sales target addresses that are “self-funded.”
Money laundering has long been a maligned issue in the art world, and it’s easy to see why. Many have asked if NFTs have been similarly abused because of their history and the anonymity of crypto assets. So, is it possible to launder money through NFTs?
Yes. Scammers, malware operators, and Chatex all use NFTs to launder money. Chatex is a crypto currency bank that claims to make cryptocurrency transactions safe, simple, and convenient, while maintaining the functional advantages of traditional banks.
While money laundering in physical artwork is difficult to quantify, the inherent openness of blockchain allows us to make more realistic estimates of NFT money laundering. Therefore, money laundering occurs from time to time in the NFT market.
Chainalysis tracks wash trading scams by looking at NFT sales to addresses that are “self-funded” — sales either by the address that originally funded the sales address or by the sales address itself.
Hundreds of wash trades were discovered through this strategy. For example, a user identified by Chainalysis as the most active shuffle trader was found to have made 830 transactions to addresses they self-funded.
5.Why is shuffle trading a big problem in the NFT space?
NFT shuffle trading is a problem for investors, the global community, collectors and traders because these participants use less liquid, non-fungible tokens to manipulate the price of the asset.
Due diligence is made more difficult as investors are forced to rely on measurable statistics and make poor investment decisions. To encourage NFT investment and prevent NFT scams, discrepancies in the data must be investigated by experts. Additionally, NFT crimes hit the NFT community the hardest. Regulators and proponents of mainstream financial services can now use shuffle trading to challenge decentralization.
Likewise, collectors and traders cannot make sound judgments. It’s easy to make hasty decisions when deceptive facts and history mislead people about a piece of art or collectible. The NFT market has already been affected by shuffle trading. So, is there a way to spot shuffle trades in the first place?
When new NFTs are introduced to the market, there is no history of price or volume. As a result, developers or other insiders may engage in shuffle transactions to deceive participants about the NFT’s true value. Therefore, avoid investing in such projects.
Additionally, many NFTs have no trading volume or investor attention. Therefore, NFT owners can easily participate in shuffle transactions to induce naive buyers to buy NFTs at exorbitant prices. Therefore, avoiding newly issued small-cap cryptocurrencies and NFs is the most important way to prevent wash trading.
Traders must choose more mature, higher-volume cryptocurrencies to avoid falling victim to wash trading. The wider the market, the more funds scammers need to manipulate. For example, mature cryptocurrencies like Bitcoin (BTC) or Ethereum, which are worth hundreds of billions of dollars, are much more difficult to shuffle.