Key Insights
- CLS Global, a self-proclaimed market maker, recently pleaded guilty to wash trading and wire fraud in January of this year.
- The Federal court in Boston has ordered the company to pay a hefty $428,059 in fines, as well as a three-year probation.
- According to reports, CLS Global is not the only entity targeted in this operation. The FBI also uncovered some similar activity from two other firms.
- A report from the US National Bureau of Economic Research showed that illegal wash trading could account for 70% of the volumes on unregistered exchanges.
The crypto market has long struggled with fraud, especially in trading practices.
The latest case in this trend comes from UAE-based CLS Global, in a classic market manipulation move.
CLS Global, a self-proclaimed market maker, recently pleaded guilty to wash trading and wire fraud in January of this year.
As a result, the Federal court in Boston has ordered the company to pay a hefty $428,059 in fines, as well as a three-year probation.
This move has effectively barred the company from participating in the US crypto market during this period, and is likely to have further consequences for the market as a whole.
FBI Unmasks Fake Trading Activities
The charges against CLS global came from a recent undercover operation by US law enforcement agents.
This operation aimed to expose fraudulent practices in the country’s financial markets, which are designed to mislead investors.
The FBI created NexFundAI, a fake crypto project on the Ethereum network, to lure companies engaged in wash trading.
CLS was one of the firms that fell into the trap, after agreeing to provide market-making services for the fake NexFundAI token.
These “services” that CLS offered involved inflating trading volume for the cryptocurrency, through automated self-trading.
This move is a classic wash-trading scheme that creates an illusion of market activity for fake cryptocurrencies, in a bid to attract unsuspecting investors.
CLS Global’s Wash Trading Tactics
During a series of video conferences, an employee of the firm revealed that the company used an algorithm that “basically does self-trades.”
Said algorithm used multiple wallets to create the appearance of real buying and selling activity:
A practice that is illegal, because it provides a fake appearance of supply and demand.
Investors tend to see these and go all-in on scam projects, eventually losing it all when the bubble bursts.
The same employee acknowledged, “I know that it’s wash trading and I know people might not be happy about it.”
Despite being aware of its own wrongdoing, CLS Global continued to engage in wash trading, until it was caught by the FBI.
The Crackdown On Market Manipulation Is Wider
According to reports, CLS Global is not the only entity targeted in this operation.
The FBI also uncovered some similar activity from two other firms. One of these was the Hong Kong-linked ZM Quant Investment, with the other being the Russia-linked Gotbit Consulting.
In October of last year, the SEC in the US filed fraud charges against CLS global and its employee, Andrey Zhorzhes.
The ongoing case against CLS Global shows the US government’s increasing efforts to regulate the crypto markets and punish bad actors.
Attorneys in Massachusetts have so far take action against illegal crypto market practices, while setting an example for firms looking to participate in these schemes in the future.
CLS Global and Wash Trading In The US Markets
The firm being prosecuted was founded in 2017 as a market maker and a service provider in trading consultancy.
The company claimed to have been established to address a “huge gap in the market for high-quality market-making solutions.”
Its CEO, Filipp Veselov, previously worked at Latoken, a Russian crypto exchange.
In addition, its chief revenue office, Pavel Singaevskii was formerly a sales manager at Stex (a crypto trading platform that unexpectedly shut down two years ago).
Wash Trading, the crimes the company is being accused of, involves repeatedly buying and selling the same asset, to create a fake appearance of high trading volumes.
This tactic can mislead investors by giving them the illusion of high demand. As such, they develop positive sentiment towards the market and tend to buy in.
According to a recent report from Chainalysis earlier on in the year, the crypto market contains at least $2.6 billion in estimated wash-traded volumes.
This figure accounts for around 2% of the total daily trading activity, even though some other studies show that the issues with wash trading might be more serious.
A report from the US National Bureau of Economic Research in 2022 showed that illegal wash trading could be as high as 70% of the trading volumes on unregistered exchanges.
What the Future Holds For Crypto Regulation and Market Integrity?
The recent CLS Global case serves as a major reminder that regulatory bodies are hard at work, pursuing bad actors who manipulate the crypto markets.
Despite how law enforcement agencies like the FBI continue to set up sting operations, the risks of falling victim to fraud in trading activity has never been higher.
The crypto industry is still maturing, and regulators around the world are working to establish clear guidelines for investor protection.
Cases like these could push exchanges and market makers to be more transparent in their dealings. It could also create a healthier and more trustworthy crypto ecosystem for everyone.
Overall for investors, the case shows the importance of due diligence before buying into any crypto platform or project.
As authorities continue to crack down on illegal activity, market participants must remain as vigilant as possible, especially in the digital asset space.
