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While cryptocurrency trading can drive new opportunities, it can also present potential risks for financial institutions spanning liquidity risk, market risk, and regulatory risk.
Not all risk can be eliminated in what is still an emerging asset class with a developing regulatory framework, but one risk firms can manage is the risk of manipulative crypto trading activity occurring under their own roof, via effective surveillance technology and processes. Market abuse and manipulation in crypto markets is much like that of traditional markets. Behaviors like wash trading/churning; layering and spoofing; and “pump and dump” schemes have all been identified as behaviors to monitor for in crypto markets.
As the crypto market evolves, practitioners are gradually adopting tools and strategies that are also associated with traditional asset classes such as equities and fixed income. U.S. Securities and Exchange Commission Chair Gary Gensler has signaled that such convergence is inevitable, and the regulatory bar for crypto compliance is headed higher.
“Congress gave the Commission a mandate to protect investors, regardless of the labels or technology used. Nothing about the crypto markets is incompatible with the securities laws,” Gensler said April 18 in testimony to the U.S. House Committee on Financial Services.
“Crypto investors should have the same protection as stock and bond investors have against fraud, manipulation, front-running, wash sales, and other misconduct,” Gensler added.
The SEC generally has expressed skepticism regarding cryptocurrencies, citing concerns about insufficient investor protections and regulations, as well as excessive volatility. But until there is more clarity in the form of a proposed regulatory framework, crypto market participants have limited information to work with in terms of what behaviors regulators will monitor for. The EU’s recent vote in favor of MiCA may pave the way for US regulation in which case crypto markets can expect stricter surveillance requirements.
One area worth watching for clues to what regulators will target is enforcement actions. For instance, on March 22, the SEC charged a crypto entrepreneur and three of his companies with fraudulently manipulating the secondary market for crypto asset Tronix (TRX) through wash trading, which involves the simultaneous or near-simultaneous purchase and sale of a security to make it appear actively traded without an actual change in beneficial ownership.
Institutional firms can establish protections – in advance of formal regulatory mandates – by investing in a third-party crypto surveillance solution. According to a recent Nasdaq Anti-Financial Crime whitepaper, benefits include compliance with regulation as it evolves, investor protection, staying ahead of advanced manipulation tactics, and effective data management. These measures will help bring much needed transparency and trust within the ecosystem.
For more information and resources on crypto markets surveillance visit us here.
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