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Comment by capableweb | Hacker News Reader

I recently had to go through extensive KYC/AML email conversations and phone calls with bunch of exchanges like Coinbase and others. Got me interested how wash trading could happen, when they were so strict with me, and which exchanges were investigated.

These seems to be the exchanges they investigated. Would be interesting to see a breakdown of percentage per exchange, as I still don't understand how wash trading can happen at Coinbase since they seem to be very strict.

    Exchange Code Exchange Name

    Panel A Regulated exchanges
    R1 Bitstamp
    R2 Coinbase
    R3 Gemini

    Panel B Unregulated Tier-1 exchanges
    UT1 Binance
    UT2 Bittrex
    UT3 Bitfinex
    UT4 HitBTC
    UT5 Huobi
    UT6 KuCoin
    UT7 Liquid
    UT8 Okex
    UT9 Poloniex
    UT10 Zb

    Panel C Unregulated Tier-2 exchanges
    U1 Bgogo
    U2 Biki
    U3 Bitz
    U4 Coinbene
    U5 DragonEX
    U6 Lbank
    U7 Mxc
    U8 Fcoin
    U9 Exmo
    U10 Coinmex
    U11 Bibox
    U12 Bitmart
    U13 Bitmax
    U14 Coinegg
    U15 Digifinex
    U16 Gateio

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> We quantify the wash trading on each unregulated exchange, which averaged over 70% of the reported volume.

Coinbase isn’t one of the unregulated exchanges.

Too bad neither the title of this HN submission nor the title of the paper says "Crypto Wash Trading on unregulated exchanges", but I guess that wouldn't write as many headlines.

It’s right there in the abstract.

Yes, but I think the person you are responding to has a good point: it should be in the headline, as adding one more word ("unregulated") is a pretty significant distinction.

When the title just says "70% of the volume in the top crypto exchanges", perhaps you can forgive the skim-readers of the world for believing they meant "top crypto exchanges", as stated, rather than "top unregulated changes".

Sometimes it's nice for the title to honestly represent what the paper/blog/whatever is about without having to dive into the abstract.

I think there might even be some word for having titles which somewhat misrepresent the piece in question, often used when the title elicits more clicks by leaving out a key piece of information.

Is there somewhere to read a quick summary of the regulation of crypto exchanges, I don't know they'd become specifically regulated?

Answered in another comment: https://news.ycombinator.com/item?id=29279685

I'd argue that the original article's title was fine; they were indeed looking for wash trading across all the crypto exchanges. The second sentence of the abstract was basically, "Trading activity on regulated exchanges looks fine, but the unregulated ones are a hot mess."

It's just the altered title for the HN submission that is actively misleading.

Email the site mods using the footer contact link. Sometimes they reply in minutes. Put “FP #1” and “misleading title” somewhere in the subject.

The trick to wash trading on CoinBase is (or was) to be on the inside:

> The order also finds that over a six-week period—August through September 2016—a former Coinbase employee used a manipulative or deceptive device by intentionally placing buy and sell orders in the Litecoin/Bitcoin trading pair on GDAX that matched each other as wash trades. This created the misleading appearance of liquidity and trading interest in Litecoin.

https://www.cftc.gov/PressRoom/PressReleases/8369-21

I wouldn’t be surprised if the wash trading on these unregulated exchanges followed a similar pattern where insiders were largely using the system to their advantage and using their insider knowledge or connections to (try to) hide it.

Yeah that's a pretty well known case, specific to Litecoin. Also crypto has come a long way since 2016

I imagine the fraudulent schemes have also come a long way since 2016.

Given the volume of trading that happens on unregulated exchanges, I don’t see why anyone would think the amount of fraud has been decreasing as unregulated activity is increasing.

Sure but I was responding to a comment regarding Coinbase.

Sure, although not part of the period covered by this paper:

> Our data cover the period from 00:00 July 09th, 2019 (when TokenInsight started to collect transaction information from these exchanges) to 23:59 November 03rd, 2019 (the time we wrote the first draft).

Coinbase CFTC $6.5 million settlement: https://www.cftc.gov/PressRoom/PressReleases/8369-21

Breakdown of percentage per exchange is available on table 7 (pp 46).

Binance, for example, is measured at 46%. Typically the lower tier exchanges have higher levels of measured wash trading.

Thank you, missed that when skimming.

How about the exchanges do it themselves because there's no regulation and if they don't do it, the volumes would be way to low

I have a feeling you are correct. Exchanges have the lowest barrier to entry, non-public client position information, and cheaper access to capital than most market participants.

What's a "regulated" exchange in this context? US Exchanges are "self-regulated" and ultimately answer to FINRA and the SEC. Any rules they publish must be approved by the SEC.

Theres no such process (AFAIK) with "panel A" firms. Its still the wild west.

Does regulation mean KYC for client onboarding? Thats a completely different thing. We're not talking about on-exchange trading rules and compliance monitoring in that case.

Why don't you read through the paper?

Here is the short answer:

> We adopt the definition of regulated exchanges from the state of New York, which has one of the earliest regulatory frameworks in the world. [6]

> 6 Regulated exchanges are issued BitLicenses and are regulated by the New York State Department of Financial Services. Bitlicence carries some of the most stringent requirements. Our main results are robust to alternative classifications of regulated exchanges. As of June 2020, NYDFS has issued licenses to 25 regulated entities, six of which provide crypto exchange service. They are Itbit, Coinbase, Bitstamp, Bitflyer, Gemini, and Bakkt (futures and options only). Further information can be found at: https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_b.... (Last accessed: July 3, 2020)

Lest anyone think that the solution is more regulation, it's worth looking at the impact of the BitLicense. This overbearing regulatory framework has stifled innovation and forced crypto startups to leave the world’s leading financial hub and build their companies elsewhere. Compliance costs millions of dollars, leaving most startups with no viable option except to block their users from accessing their services in NY. No one wins. In their misguided attempt to protect their citizens, they inadvertently blocked New Yorkers from participating in the best performing asset class of the decade.

What makes you think it was inadvertent?

The CFTC does have some jurisdiction.

Coinbase: https://www.cftc.gov/PressRoom/PressReleases/8369-21

Kraken: https://www.cftc.gov/PressRoom/PressReleases/8433-21

Great data! I am no longer confused as to why the Binance Bridge between ETH and BSC is getting shut down…in six days.

> I recently had to go through extensive KYC/AML

I'm not entirely sure how KYC/AML are related to wash trading ...

In other words: how is the amount of checks they impose on their customers related to what goes on in their trading engine?

Or do you assume that because they're very strict on one thing necessarily implies they're strict everywhere?

That's quite a stretch.

Wash trading is not just one thing, I give you that. But a frequent way of achieving wash trading is to buy and sell from yourself via multiple accounts. KYC/AML + Terms of Conditions specifying you can only own one account prevents that, as much as it can at least. Even if you are two different people just trading between you, AML laws will prevent that and surely Coinbase has the most basic checks in place to detect something that simple.

How does Coinbase self-regulate wash trading?

> How does Coinbase self-regulate wash trading?

Coinbase follows KYC laws. That prevents one person from opening two accounts and trading between them.

Huh. What if 2 people decide to do it?

> What if 2 people decide to do it?

Two accounts trading back and forth will light up anti-spoofing tech from the 1980s. Keep in mind that the AML regulations Coinbase follows are specifically designed to catch fake money movement.

Anti-spoofing tech for regulated securities. There's no rules for crypto to suggest that Coinbase needs to (or would) flag a group of individuals doing this.

> Anti-spoofing tech for regulated securities. There's no rules for crypto to suggest that Coinbase needs to (or would) flag a group of individuals doing this.

It's the same stuff that catches money laundering. Coinbase isn't exempt from anti-money laundering laws. (With respect to Coinbase not being subject to the Exchange Act, that's very much an open, if irrelevant to this discussion, question.)

I don't see how that is relevant here. Wash trading is market, price, and reputation manipulation, not money laundering or tax evasion.

I'm not sure Coinbase's need to report money laundering applies.

> Wash trading is market, price, and reputation manipulation, not money laundering or tax evasion

A lot of money laundering involves wash trading. That's why institutions like Coinbase have systems in place to detect it. Non-laundering wash trades would get flagged by such a system. If it were systemic, it would almost certainly merit a SAR.

>A lot of money laundering involves wash trading.

Citation needed, because wash trading and money laundering are not mutually inclusive. There are not controls in place for money laundering that detect wash trading, because crypto is not a regulated security.

Pretty sure that none of the honest and upstanding people in the crypto-world would attempt to circumvent regulations like that!

Does that mean they don't try to prevent a group of individuals coordinating wash trading between their accounts?

> Does that mean they don't try to prevent a group of individuals coordinating wash trading between their accounts?

To wash trade effectively for more than a single instance one needs hundreds to thousands of accounts. Somebody could coördinate that many people. But it's hard. And it creates exhaust lights up law enforcement radars, as it's practically indistinguishable from money laundering.

Ya I seriously doubt there is much wash trading at the Tier A exchanges you listed above.

The market is interdependent. Wash trading on one platform benefits all other platforms. When you ask someone the price of BTC they don't say $x on Coinbase, $y on Kraken, etc.

Literally all of crypto is a scam. After 10 years there is not one feasible use case that isn't done better through another tool. I don't consider "making black markets and extortion easier" a feasible use case.

But it is a use case, along with gambling via crypto day trading.

You may not like it morally and may wish for crypto to be legally banned as a result, but casinos are real and extortion is real.

You are both right, but unlike crypto, casinos and crime facilitating black markets don't pretend to be something other than what they are.

However, I tend to think crypto is a bit more than that: an anti institutional weapon.

Therefore it's not a coincidence that crypto also serves the above use cases that specifically seek to avoid institutional oversight, or in circumstances where institutions have already failed (i.e. Venezuela).

Once the illusions of anarcho-capitalist utopia dissolve, that's what's left, and crypto's fundamental market value - minus the greater fool stuff - reflects the sum of 1) the fear of and 2) enthusiasm for the destruction of institutions, with both of those pushing the value up.

Stronger, trusted, adaptive, and accountable institutions that provide their societies with security and broadly shared well being will push it down.

Oh yeah?

Ever tried to send funds to a family member on the other side of the world over a weekend?

Not on the other side of the world but my parents send me through Zelle and works pretty easily - hits the account same day.

I tried Zelle the other day to send a payment.

New user? Payment frozen, no recourse until Monday morning on a Friday, late afternoon.

I'll stick with Coinbase, if I want centralized risk.

FWIW, cryptocurrency settles in seconds.

https://coinmarketcap.com/alexandria/article/how-long-does-a...

> On the Bitcoin network, the average confirmation time for a BTC payment is about 10 minutes. However, transaction times can vary wildly.

This is because it is affected by factors such as the total network activity, hashrate and transaction fees. If the Bitcoin network is congested, there will be a backlog of transactions in the mempool. This would result users paying more in transaction fees to get transactions to go through faster. This occured in April 2021, where average Bitcoin transaction fees reached $59.

I'm familiar with cryptocurrencies. I did not say Bitcoin. One counterexample isn't representative of current options. There are plenty of coins which clear in seconds.

Western Union, cash money in minutes in nearly all over the world ?

Fees, lack of security, in person?!, etc

They're not open at night. They take egregious fees, often up to 20% on the exchange rate. You can't send more than $2,500 online. And who wants to stand in line, fill out paperwork, or walk around with large sums of cash? If that exploitative company is the best example you've got, I rest my case.

You wrote: <<They take egregious fees, often up to 20% on the exchange rate.>>

I find this hard to believe. Can you please demonstrate a single transaction with this fee?

They usually have both a flat-rate transition fee, and some spread they take on top of whatever open market exchange rate would otherwise be.

For small transactions, you can have things like a $29 fee, for a $500 transaction, where the spread is also taking a 1% cut. You also can find $2.99 transactions. It depends on the source of funds and destination. Also if you are doing something like using a credit card as the source of funds, you might get cash-advance fees (and much worse interest rates).

Source: https://www.finder.com/western-union-international-money-tra...

I've never used Western Union personally, so don't listen to me. Listen to their customer reviews:

https://www.sitejabber.com/reviews/westernunion.com

The reason financial transactions take time is not that there's something wrong with the technology, but that we, as society, have chosen to establish capital controls. Choosing to evade such controls, without really understanding why we put them there in the first place, basically makes you an anti-social brat.

> ...we, as society, have chosen to establish capital controls.

Obviously that's not the case if entire societies use bitcoin now, as soon as it is an option. We didn't choose the mess, it was foisted upon us.

You can make excuses for the current system if you want to, but you're wrong. You can shame people tired of paying a quarter of their pay to western union to help Tia afford a water tank so she can have running water during the weekdays. You can demand people just follow rules that make no sense to them because "we as a society" have Good Reasons™ for them. But if you expect them to, if you act like their behavior makes no sense, you're deluding yourself and nobody else.

> We didn't choose the mess, it was foisted upon us.

What mess? Borders and customs? Yes, we chose that.

Are you being obtuse deliberately?

First, no, most people didn't choose borders and customs. The very people we are talking about, the people that send money home, and their advocates, often ignore borders deliberately. I don't recall choosing any of that stuff. I don't think there's a person alive today that did.

But that aside, we aren't talking about someone checking your luggage for fruit seeds on the way in. You know damn well what mess I'm referring to, because you've spent however long in this thread defending it like none of the problems people point out exist.

If none of the people alive today wants borders, how do you explain the existence of borders? What is your theory? And no, I don't know what 'mess' you are referring to. You seem to talk quite cryptically, to be honest.

Alright, I'll draw it in crayons: having to pay 25% of your income to send part of your income home to family. That mess. The one I mentioned already that you handwaived over.

I never said nobody wants borders, I said nobody chose borders. We were all born into this. You understand the distinction between choosing something and learning to live with it?

Of course that's a tangent on your original statement, your assertion that we choose capital controls, that you have not addressed. If our society left capital control to a democratic process they wouldn't exist, and the proof of that is that people avoid them at every opportunity, hence bitcoin.

Shit, "capital controls" is a distraction from the issue we were trying to address, which is the ridiculous state of the remittances industry as an example of the state of the consumer financial services industry that bitcoin serves as an alternative to that you keep defending but fail to actually construct an argument in defense of. "We chose them for a reason" "what reason?" "oh you don't like borders?" It's senseless.

People choose bitcoin. Actual individuals choose it. Nobody holds a gun to their head and makes them use it. The same cannot always be said of the alternative. Is people choosing it a good enough reason for you to accept that it is good and should exist? Seems to be a good enough reason for the alternatives to exist, even if it isn't true.

I don't talk cryptically, I stay on point. I don't derail, I don't create tangents. You do, with every single reply. Not everyone gets lost in the noise.

Alright, now that you have laid out your argument we can see how silly it is. The fact that some people don't like a regulation, or that some people choose to contravene it, doesn't mean that such regulation is illegitimate. A regulation is legitimate as long as it is put in place by a legitimate (i.e. democratic) government. And since a democratic government represents the will of the people, it's clear that we the people have indeed put the regulation in place. Nobody says you have to agree with it, but not agreeing with a regulation is not a reason to infringe it. That's just childish.

So "the government is legitimate, problem solved." All good then, I simply do not understand why there are social problems and resistance movements worldwide, it is childish! The governments are legitimate!

If these governments actually represented the will of the people, the people would not be using bitcoin to send money home. Or smoking weed for that matter. There is a giant blind spot in your worldview IMO.

There's a whole host of other problems with your point, such as who decides whether a government is legitimate (you? Some "democratic committee?"), whether people in China or KSA can rightly disobey laws because they're not democratic, whether you have the right to force me to be one of your people, and probably more I didn't catch, I'll let you bring them up if you want to talk about them.

> If these governments actually represented the will of the people, the people would not be using bitcoin to send money home. Or smoking weed for that matter.

This is not how it works. If a significant number of people oppose a certain regulation, a public debate will ensue, and sometimes the general mindset with regards to the issue will shift and then the regulation will change accordingly. This is how democracy works. If you think that capital controls should not exist, feel free to make a case against such controls, but you will have to do a little better than "oh, look, it's a mess, let's get rid of capital controls". Nobody is going to take you seriously unless you present a convincing argument, and coming up with a convincing argument would require, for a start, an understanding of the reasons behind current regulations with regards to capital controls.

> This is not how it works.

That's exactly how it works. That's not how you want it to work, but that's how it plays out in practice. You might want to ideally live in a world where a frictionless public debate occurs and people assess the value of a law and decide democratically whether to follow it, and then follow it whether they like it or nor and adhere to the rule of majority, and ideally I'd agree a democracy should work like this. But how it actually works is people disobey laws they don't like. People smoke weed if they want to, regardless of the legality. That is how it works.

And the reason is because changing laws is not in practice frictionless and the result of majority sentiment. There's inertia, there's entrenched interest, there are deliberate roadblocks to the will of the people put in place by the powerful. Democracy doesn't work as well as you are imagining it should, and people deal with that by giving up on it just a little and making decisions for themselves.

The only convincing argument I require is that if people want to use it they will. I don't need your permission, and frankly I don't care if people take me seriously. I understand this means that democracy will fall apart, but if democracy were working for people as the sales pitch said it would it wouldn't be falling apart in the first place.

What if the reason of slow adoption is traditional institutions act against it?

I don't think that's the case. There was a period of time about 5 or so years ago where you could pay with Bitcoin almost anywhere. That's all but disappeared after a wave of $100 transaction fees hit.

Use case was killed by itself.

> There was a period of time about 5 or so years ago where you could pay with Bitcoin almost anywhere.

I do not recall this time at all.

Surely, that means it never happened. You must be some sort of oracle.

https://www.techrepublic.com/article/pay-with-bitcoin-10-of-...

https://money.cnn.com/2014/09/26/technology/paypal-bitcoin/

https://www.businessinsider.com/dell-becomes-biggest-company...

https://money.cnn.com/2014/12/11/technology/microsoft-bitcoi...

What’s the threshold for “pay with Bitcoin almost anywhere”? 95%? 90%?

Surely the fact that articles are written about individual retailers who are now (then) taking Bitcoin is evidence against the acceptance of BTC being pervasive as a payment instrument rather than evidence in support of it.

I searched for less than 5 minutes and found four examples pretty handily. Anyway, the point was that you could pay with BTC and high transaction fees killed that use case. Feel free to substitute "anywhere" as you please.

Completely agree, I’d much rather lose at least 6.2% (if not 20%) in totally legitimate fiat currency inflation than see 200% returns on crypto as a result of that money printing.

QE definitely isn’t wash trading.

That's how all Ponzi schemes are marketed. "I got rich, so can you!"

If you are using the P word in a conversation about crypto, chances are you are not adding much value to the conversation.

That particular dead horse has been beaten to a point where all is left are strictly people adhering to dogma on one side or the other of the conversation.

Try tulips next, to make the picture complete.

It's a cliché for a reason.

This is why I didn't get a desk job where I had to show up by 8am...seemed like a cyclical ponzi scheme.

Like social security where old investors are paid out from the income of new investors? And your "investments" are just IOUs from the general revenue fund of the same company?

How is QE even remotely wash trading?

Closely related parties, no change in beneficial owner, entity trading is paid a commission of other market participants profits that result from the artificial inflation of the asset, buying and selling the same or substantially similar assets within 30 days.

If anyone else took 15% of everyone else's returns on that asset and was using their own money with the stated purpose of inflating the asset price, they'd go to jail.

"For example, wash trades were used in the LIBOR scandal to pay off brokers who manipulated the LIBOR submission panels for the Japanese Yen. According to charges filed by the UK financial authorities, UBS traders conducted nine wash trades with a brokerage firm to generate 170,000 pounds in fees as reward for the firm for its role in manipulating LIBOR rates.7"

I would say there are four important use cases of Crypto so far.

1) NFTs - digital ownership

2) DAO - organizations without having to setup an LLC that allow voting etc

3) Accounting for low trust societies (supply chain management, etc)

4) Value store for very high inflation currencies, or states with severe problems

1. Digital ownership of a token. Digital assets can still be copied and distributed. Notions of ownership and title in digital are still inherently problematic. 2. This is probably not a feature society needs. 3. Possibly good? I'd say instead of "low trust" being the feature, "no natural owner of the database" describes the supply chain situation better. 4. maybe. USD, Gold, Etc have historically been good at this.

> Digital assets can still be copied and distributed. Notions of ownership and title in digital are still inherently problematic

Some NFTs come with additional publishing rights for the underlying asset. For example Eminems sold an NFT that contained to the rights and a different rapper bought it to make a song with it: https://bitcoinist.com/the-rapper-who-bought-eminems-nft-for... I think we're going to see more stuff like this in the future.

> 2. This is probably not a feature society needs

You might be right, but we do allow LLCs so we do allow a more difficult way to do the same thing. There is less regulation around DAOs but that's starting to change in some states, I'm for letting the experiment run

> 3. Possibly good?

I think this is a net benefit

> 4. maybe. USD, Gold, Etc have historically been good at this.

Yeah, for this one in particular I was thinking of stable coins that are backed by USD

If someone sells the NFT and publishing rights to a work at the same time… couldn’t they just sell the publishing rights? It’s like you’re buying the publishing rights and getting a receipt for your purchase and people are acting like the receipt is the big deal.

>3. Agree. There are a lot of databases that should exist, but the economic incentives of individual participants in a system means nobody wants to pay for it. Blockchains might present a way to make an end to end distributed database with no single owner, but where commercial interest still exists. (E.g. not open source)

If you don't consider black markets a feasible use case you're cherrypicking.

https://goo.gl/search/Define+feasibility&hl=en feasibility (noun): state or degree of being easily or conveniently done

The originator, Ross Ulbricht, is in prison for life. Anything that involves any remote possibility of that is not "feasible" to me, specifically in terms of the strength of my own self-preservation instincts.

So because it isn't a magic bullet that makes participants bulletproof it's infeasible? Would you say dollars are infeasible as a black market tool as well? What about cocaine?

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