Dark Practices Reign on Unregulated Crypto Exchanges: NBER Study

1. A recent study by NBER revealed that over 70% of transactions on unregulated crypto exchanges are fake.
2. Wash trading is a process where a trader buys and sells a security to create misleading information about the commodity.
3. Dark practices like wash trading, price manipulation and rug pulling have been a stumbling block in the crypto industry’s race for global adoption.

A recent study by the National Bureau of Economic Research (NBER) revealed that users on unregulated crypto exchanges engage in wash trading, leading to more than 70% of the volume of these exchanges being fake. Wash trading is a process where a trader buys and sells a security to create misleading information about the commodity, resulting in investors believing that trading volumes are higher than reality, and potentially increasing trading activity in a security as legitimate money enters the market.

NBER sampled 29 unregulated crypto exchanges for the research and found out that wash trades accounted for more than 70% of the volume of these exchanges. The research suggested that wash trading volumes in unregulated exchanges are as high as 80% in some cases. However, NBER noted that wash trading is more likely to happen in smaller and lesser-known exchanges rather than in big exchanges with a long history of users and compliance with regulations.

The issue of wash trading in the crypto industry has been a major concern for some time now, as it is estimated that $4.5 trillion was pumped into spot markets as a result of wash trading in Q1 2020 alone, and $1.5 trillion in derivatives markets in Q1 of 2022. Dark practices like wash trading, price manipulation and rug pulling have been a stumbling block in the crypto industry’s race for global adoption.

In light of the recent FTX collapse, there have been increasing calls for crypto exchanges to adopt measures that would guarantee total transparency to the public. This includes the implementation of robust Know Your Customer (KYC) procedures, the adoption of advanced anti-money laundering (AML) measures, and the implementation of stringent market surveillance and trading rules.

The research conducted by NBER has shed light on the prevalence of wash trading on unregulated crypto exchanges, and the need for greater regulation and transparency in the industry. With the right measures in place, the crypto industry can move away from these dark practices and continue its journey towards global adoption.