Spotlight on Crypto Market Manipulation banner

How big are crypto’s market manipulation problems? These companies are building tools to find out.

Over 80% of the top BTC pairs trade volume on the top 25 exchanges tracked by CoinMarketCap is wash traded, a recent report from the Blockchain Transparency Institute says, adding evidence of potentially predatory exchanges scamming listing fees from token projects to the list of market manipulation concerns in the still under-development digital assets market.

As more institutional investors enter the crypto markets each year, a growing number of service providers are eager to fill gaps in the ecosystem for institutional clients with big budgets and big concerns. While it’s been commonly held that high price volatility is delaying most institutional funds from risking capital on crypto, that’s not what these service providers are seeing.

“Depending on what type of investment profile one is looking for, volatility could be viewed by some as an opportunity to profit for those who are less risk-averse,” a spokesperson from blockchain data and research company Brave New Coin said. “In reality, I think secure custody is the greatest concern, which is why the entry of organizations like Fidelity and Bakkt will likely impact the sector positively as they will solve that issue for the risk-averse.”

While establishment finance companies like Fidelity and crypto-native startups like Bakkt see opportunities in solving institutions’ custody challenges, another is putting significant time and capital into tackling crypto’s market abuse problems: KRM22, an investment software group headquartered in London and listed on the London Stock Exchange’s Alternative Investments Market.

Fighting Crypto Market Manipulation

“This is a completely new market segment that is coming into play. We are seeing interest in crypto exchanges for trade surveillance and we are bullish in our outlook to build significant market share,” Saeed Patel, Director of Product Strategy at KRM22, told us.

Patel is a surveillance veteran, having spent over two decades at EDF Trading Markets and the National Grid in the trading markets business. He is a former forensics accountant where he uncovered market abuse in the UK markets. Now, he’s identified a rising trend in high-frequency trading being used in a market manipulative way. “I suspect the ever-increasing volumes [on crypto exchanges] are potentially driven by computerized algorithmic trading,” said Patel.

This would seem to match the Blockchain Transparency Institute’s findings. “We have discovered 4 different bot strategies which are used to inflate exchange volume numbers. Some of these bots appear to be set to different trading pairs depending on the time of day. Settings are changed based on current volume trends or hype around a given token for that time period,“ their latest report states.

Another trend that KRM22 is seeing out there is the potential abuse of social media, aimed at misinforming markets. Bad actors are able to use social sentiment to drive price in a particular direction before taking a profitable position in the asset as a result of the misinformation.

KRM22 acquired a majority stake in real-time market surveillance company Irisium last year for £2.571 million, and has inked deals with a couple of leading global crypto exchanges, including Bitfinex and Bitstamp. Now they’re in the midst of building a completely new tech suite for trade surveillance. “It gives us significant scalability to ramp up the number of transactions we can process with the ability to onboard the largest exchanges,” said Patel.

“We have invested in a very sophisticated sandbox where the end user can recalibrate the alleged market abuse scenarios like spoofing, by changing the alert parameters, run results in real time, and to see the impact through back testing. Some of our peers have this functionality but they have a dependency on technical support staff to implement changes in the program. We think our technology is a strong differentiator.”

KRM22 is also exploring the integration of communication surveillance with trade surveillance to deliver a holistic view of data to clients. “Abuse may be instigated through collusion between market participants, as seen in the banking FX and Libor manipulation scandals whereby the use of chat rooms was used extensively to commit market abuse,” Patel pointed out. “There is a great opportunity here […] to provide compelling business insights.” The company is targeting hedge funds for this solution.

Not Alone in Tackling Crypto Trade Surveillance

Nasdaq’s own SMARTS Trade Surveillance solution has expanded to include cryptocurrency monitoring features, licensing it to crypto exchanges like Gemini. A recent Business Insider report covered the growing interest they’ve seen from exchanges.

And startup Solidus Labs, whose management team hails from Goldman Sachs, has its own version of digital asset trade surveillance that it delivers to “exchanges, broker dealers, market makers and others” across Europe, the U.S., and Israel “to detect and address manipulation in digital asset trading.” The startup, which declined to comment for this article, recently attracted $3 million in venture capital in a seed round led by Hanaco Ventures.

We’re sure to see more entrants to this space as the cryptocurrency market continues to grow. An increasing number of exchanges, funds, and tokens are competing to offer opportunities for institutional capital to flow into crypto. Companies like KRM22, Nasdaq, and Solidus are bringing light to what happens once it’s there.

Gerelyn is a fintech and cryptocurrency journalist who started her career writing about traditional finance/Wall Street. She has been reporting on financial services for the past 15-plus years. In full disclosure, she holds bitcoin (BTC).