According to a study by the Blockchain Transparency Institute, exchanges fabricate around 67% of the trade volume they claim. Some exchanges do report accurate numbers, but overall 79 of the top 131 exchange pad their numbers, and some are off by orders of magnitude.
It is not unexpected, or even a new revelation that some exchanges have fake volume. It creates the illusion that traders are already using the platform – drawing in real traders and hopefully creating a user base that way. It’s not always all done by the exchange itself, either. Plenty of unscrupulous teams desperate to create hype for their small cap coin engage in wash trading – trading back and forth between their own accounts, without the coins ever really changing hands.
There have even been cases where dev teams claim they have been contacted by small exchanges that offer them free listing and special zero trading fee accounts if they agree to wash trade their own coin. Users of course gain nothing from all this, instead they have to deal with the additional headache of not knowing how much trade is actually going on on a given exchange or for some particular coin.
Legal Gray Areas
This is where crypto shows its youth. In securities, this is already illegal. As are pump and dumps, and a good deal of other things that happen daily in crypto. But because cryptocurrencies are not (yet) generally considered securities, the laws that govern trading of most financial instruments don’t apply. And even where it has been ruled one way in some jurisdictions, dev teams and exchanges usually respond by moving somewhere else, to take advantage of regulatory limbo for as long as possible.
We are still in the Wild West
For now, for good and ill, the crypto community is forced to self regulate. This latest study goes down the list, analyzing the 131 most popular crypto exchanges. Binance, Bitfinex and Coinbase all appear to be on the up and up – although keep in mind that there are still very likely individual coins whose teams engage in wash trading on these exchanges – they just aren’t stupid enough to make it obvious.
The largest exchanges that seem to be inflating their numbers are Huobi and Okex, both with more than 90% fake volume. As we go down the list we find even more extreme cases, with LBank inflating their numbers 4400:1, and BCEX by over 20,000:1.
Interestingly, one of the best indicators that an exchange is being honest (other than regulatory oversight/the threat of jail time), is if the exchange offers some kind of profit sharing model with its users, like KuCoin and COSS. Any exchange can fake volume if they want to, since the fees go straight back to themselves, but for exchanges that are bound to share all fees with holders of their exchange token, it would quickly become prohibitively expensive.
