Hacking, Fake Volume And Market Manipulation – The Issues In Crypto Trading And How One Company Is Helping Combat Them

Last year, the world witnessed the powerful potential of cryptocurrency as a new asset class.

Operating alongside a rampant post-pandemic bull run, Bitcoin’s BTC/USD market capitalization climbed to a height of $1.1 trillion, dwarfing nearly every U.S. stock market listing save Apple Inc. AAPL, Amazon.com Inc. AMZN, Microsoft Corp. MSFT and Alphabet Inc. GOOGL. 

In a more symbolic sense, blockchain’s central values — like anonymity, decentralization and personal power — were also championed throughout this run, bringing its advocates to new heights of confidence. But beyond the wave of euphoria, experts close to the intricate workings of these blockchain systems began to detail a story showing an asset class in its infancy. 

Ripe at this stage are issues that mature markets — such as equities, bonds and foreign exchange — have long been combating but are largely unaddressed in crypto. Recent activity at Three Arrows Capital, Voyager and Celsius have proven the need for better risk controls, risk management, disclosures and, above all, a regulatory framework for the crypto asset class. 

Issues In Crypto

The Three Arrows Capital (3AC) fiasco exemplified all that’s wrong with the unregulated crypto environment. The story unfolds as follows: 

After amassing a reported $10 billion fortune, most of which was driven by uncollateralized loans, 3AC placed a $200 million investment into LUNA, a stablecoin that had been pegged to the U.S. dollar. When, unexpectedly, Luna’s algorithm deviated from its pegging protocol, the coin’s value fell from $80 to a couple of cents, triggering a significant loss for 3AC and foreshadowing future crypto catastrophes. 

Coupled with a 2022 bear market that crippled their investments in Bitcoin, Ethereum and other cryptocurrencies, 3AC experienced a wave of margin calls from crypto lenders BlockFi, Genesis and Voyageur. Extenuated by failing investments like Axie Infinity, which experienced a $600 million hack, the firm eventually defaulted on its margin calls and filed for bankruptcy. 

3AC’s downfall led to a wave of potent declines in crypto lending platforms. Voyageur filed for bankruptcy after 3AC failed to pay its $670 million, while Blockchain.com, FTX, Genesis, BlockFi and BitMEX all incurred life-threatening losses.

Potential Future Solutions

According to some, these failures have shined a light on the importance of regulated markets and the need to manage counterparty risk, credit risk, liquidity risk, anti-money laundering (AML) and fraudulent activity. 

With proper regulatory guidelines and professional surveillance, the crypto market can finally “grow up,” and move into the adolescent/mature stages of its development. Specifically, regulators envision that the future of crypto will include:

• Extended focus on how counterparties are regulated to satisfy both customer and regulator inquiries and requirements
• Risk management will become much more prominent - with questionnaires, credit assessments and limits, know-your-customer (KYC) and AML protocols all set as requirements as in the regular trading environment
• Certain operational controls and auditing requirements – similar to SOC 2 type II – with certifications coming from regulatory bodies
• Dissipation of the advantages of skirting compliance and oversight and a drive towards building trust through adherence to regulation
• Prosecution of those who beach regulatory principles, leading to a loss of jobs, fines, and possible imprisonment

The belief is: If the crypto trading environment wants to ever be taken seriously by mainstream investors, it must begin acting in a far more responsible manner. 

Cboe Works To Bridge The Regulatory Gap 

Some operators are championing the regulatory movement.

Through a recent acquisition of Eris Digital Holdings or ErisX, Cboe Global Markets Inc. CBOE has formalized a commitment to filling the trust gap and bringing the intermediaries that serve ordinary people to the platform to enable their customers to trade confidently.

ErisX is a U.S-based digital asset spot market, a regulated futures exchange and a clearinghouse. Among the firm’s central beliefs is faith in the power of appropriate regulation, surveillance and monitoring practices to rid cryptocurrencies – and their traders – of market fraud and manipulation.

ErisX Insights claims that centralized exchanges provide a far more secure way to trade in cryptocurrency than their decentralized counterparts.

The company writes, “As a centralized exchange, ErisX leverages a matching engine that will prevent ‘front-running’ and operates a market surveillance program to thwart malfeasance. While market participants on decentralized exchanges may experience the type of market manipulation described [above] …, they will not find it on ErisX.”

To combat sophisticated market manipulation practices, ErisX champions the use of a blend of adaptive tools and an experienced market surveillance team. “Eventus tools allow us to deploy the processes necessary to enable these principles while paving the way for the inevitable market maturation and growth that we will see in the future,” writes ErisX. 

By being subjected to regulatory oversight by authorities like the Commodities Futures Trading Commission and the New York Department of Financial Services, ErisX believes its platform holds a security standard that its decentralized counterparts cannot replicate and that only through this path can cryptocurrency finally be rid of unethical practices. 

For traders curious or doubtful about ErisX’s quest for regulation, the company is holding a panel discussion on Sept. 20. Click here to stay informed. 

Featured photo by Scott Web on Unsplash

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.

ErisX Futures are offered through Eris Exchange, LLC, a Commodity Futures Trading Commission (CFTC) registered Designated Contract Market (DCM) and Eris Clearing, LLC, a registered Derivatives Clearing Organization (DCO). The CFTC does not have regulatory oversight authority over virtual currency products including spot market trading of virtual currencies. ErisX Spot Market is not licensed, approved or registered with the CFTC and transactions on the ErisX Spot Market are not subject to CFTC rules, regulations or regulatory oversight. ErisX Spot Market may be subject to certain state licensing requirements and operates in NY pursuant to Eris Clearing’s license to engage in virtual currency business activity by the New York State Department of Financial Services.