Last week, Gotbit's CEO was arrested in Portugal at the request of the U.S. The company was charged with market manipulation and wash trading.
Wash trading occurs when one person (or company) acts as both the buyer and seller in the same transaction. At first glance, it makes no sense. However, the goal of wash trading is to either boost the price of an instrument (by constantly buying at higher prices) or to boost trading volumes in an illiquid asset.
Many traders and algorithms use price and volume patterns to find attractive investments. If an instrument goes up in price at a high trading volume, it will attract real traders and investors, providing the illicit actor with an opportunity to cash out by unloading his initial position into new money at high prices. That’s why wash trading is prohibited.
At first glance, the Gotbit case looks like a trivial fraud case that happened in crypto. However, several days after Gotbit CEO was arrested, the SEC filed a against a major crypto market maker, Cumberland.
The SEC charges Cumberland for “operating as an unregistered dealer in the crypto asset markets.” According to the SEC, Cumberland bought and sold crypto assets offered and sold as securities for its own accounts as part of its regular business. As usual, the SEC treats most cryptos as securities and denies the industry’s view, which implies that the sales of crypto assets are similar to the sales of commodities.
The SEC has been long trying to increase its control over the crypto markets. This time, the SEC has decided to focus on market makers. The market maker function is extremely important in the markets. Market makers serve as liquidity providers of last resort and smoothen price fluctuations.
The cases of Gotbit and Cumberland have just one similarity — both companies were market makers. While Gotbit was accused of outright criminal activity, the claims against Cumberland are centered around the fact that the company did not register as a securities dealer with the regulator.
Given the role market makers play in financial markets, it’s safe to say that the SEC continues to boost its control over crypto and tries to limit the pace of crypto market development. Any restrictions on market makers’ activities will hurt crypto market liquidity. Should we worry about this scenario?
In Gotbit’s case, we are talking about scam practices in illiquid coins. The elimination of such actors will improve the marketplace for all.
In Cumberland’s case, we are looking at a legitimate market maker. At first glance, the company’s business is not at risk, since the SEC accuses the company of violating registration rules rather than fraud.
Apparently, the case of SEC vs Cumberland could drag on for a long time, similar to the seemingly endless SEC vs Ripple. It should be noted that the market has barely noticed the SEC’s latest attempt to put pressure on crypto, which indicates that investors have already developed immunity to the SEC’s FUD.
