The study, titled "Crypto Wash Trading," analyzed 29 unregulated exchanges and determined that, on average, more than 70% of the volume within these platforms was made up of wash trades. In some cases, the wash trading volume was as high as 80% of the total trading volume.
The researchers found that wash trading, or the act of artificially inflating trading volume through fake transactions, has short-term incentives. It can impact the rankings of exchanges on data and statistics websites like CoinMarketCap and affect crypto prices within the exchanges over the short term.
Crypto Exchange FTX Continues to Face Scrutiny Following Bond Release of Former CEO
The crypto exchange FTX has been under scrutiny following the release of its former CEO, Sam Bankman-Fried, on a $250 million bond. Wallets linked to Alameda Research, a company associated with FTX, have shown movements of around $1.7 million in assets through crypto mixers. This has further damaged trust in centralized exchanges (CEXs) among users.
However, executives working on CEXs have expressed optimism that the industry can recover post-FTX. In a recent interview with Cointelegraph, various leaders within crypto exchanges shared their thoughts on how CEXs can win back user trust.
Impact of Wash Trading on Cryptocurrency Prices and Exchange Rankings
According to the NBER study on wash trading, fake transactions can have a short-term impact on cryptocurrency prices and exchange rankings. The study found that wash trades can artificially inflate the trading volume of exchange, leading to higher rankings on data and statistics websites like CoinMarketCap. This can lead to more users flocking to the exchange and potentially driving up the prices of cryptocurrencies listed on it.
However, it's important to note that the long-term effects of wash trading are not apparent. While it may temporarily boost an exchange's reputation and bring in more users, it can also lead to a lack of trust and credibility in the long run. It's important for users to do their due diligence and research when choosing an exchange and be aware of potential red flags such as excessively high trading volumes or suspiciously low fees.
Steps Crypto Exchanges Can Take to Regain User Trust
In the wake of the FTX scandal and other instances of fraud or mismanagement within the crypto industry, exchanges must work towards rebuilding user trust. Here are a few steps that exchanges can take:
Increase transparency: One way for exchanges to demonstrate their commitment to integrity is by being transparent about their operations and business practices. This can include publicly sharing information about their team, financials, and security measures.
Implement strong security measures: Exchanges handling user assets should prioritize security and have robust measures to protect against hacks and other cyber attacks.
Offer excellent customer service: Providing prompt and helpful customer support can go a long way in building trust with users. Exchanges should have clear and accessible channels for users to reach out with questions or concerns.
Adhere to regulations: Exchanges that operate compliant and regulated manner can help instill confidence in users. This includes following relevant laws and regulations and obtaining any necessary licenses or approvals.
Communicate openly and honestly: In the event of any issues or mistakes, exchanges need to be upfront and honest with their users. This can help to mitigate damage and demonstrate a commitment to transparency and accountability.