Last week, the CEO of Gotbit was arrested in Portugal at the request of the United States. The company has been accused of market manipulation and wash trading.
Wash trading occurs when a person (or company) acts as both a buyer and a seller in the same transaction. At first glance, this makes no sense. However, the goal of wash trading is either to increase the price of an instrument (by constantly buying at higher prices) or to increase trading volumes on an illiquid asset.
Many traders and algorithms use price and volume models to find attractive investments. If the price of an instrument increases with high trading volume, it will attract real traders and investors, providing the illicit actor with the opportunity to cash out by offloading their initial position into new money at high prices. This is why wash trading is prohibited.
At first glance, the Gotbit case seems like a trivial fraud case that occurred in the crypto space. However, several days after the Gotbit CEO’s arrest, the SEC filed a complaint.
The SEC accuses Cumberland of “operating as an unregistered broker-dealer in the crypto asset markets.” According to the SEC, Cumberland purchased and sold crypto assets offered and sold as securities for its own accounts in the course of its regular business. As usual, the SEC treats most cryptocurrencies as securities and rejects the industry view, which implies that sales of crypto assets are similar to sales of commodities.
The SEC has long attempted to increase its control over crypto markets. This time, the SEC has decided to focus on market makers. The function of market maker is extremely important in the markets. Market makers serve as liquidity providers of last resort and smooth out price fluctuations.
The cases of Gotbit and Cumberland have only one similarity: both companies were market makers. While Gotbit has been accused of outright criminal activity, the complaints against Cumberland center on the company’s failure to register as a securities broker with the regulator.
Considering the role that market makers play in financial markets, it is safe to say that the SEC continues to tighten its control over crypto and attempts to limit the pace of development of the crypto market. Any restrictions on the activities of market makers will harm the liquidity of the cryptocurrency market. Should we be worried about this scenario?
In the case of Gotbit, we are talking about fraudulent practices regarding illiquid coins. Removing these players will improve the market for everyone.
In the case of Cumberland, we are dealing with a legitimate market maker. On the face of it, the company’s business is not at risk, since the SEC is accusing the company of registration violations rather than fraud.
Apparently, the SEC vs. Cumberland case could drag on for a long time, like the seemingly never-ending SEC vs. Ripple case. It’s worth noting that the market has barely noticed the SEC’s latest attempt to put pressure on crypto, indicating that investors have already developed an immunity to SEC FUD.
