How Wash Trading & Cryptocurrency Works in Money Laundering

Undoubtedly, cryptocurrency is promoting a transparent and decentralized financial system, rising from $910.3 million to $1902.5 million at a CAGR of 11.1%, but it’s also becoming a haven for illegal activities.

The most concerning and rising problems in the crypto space are wash trading and money laundering. Not to mention that these manipulative practices facilitate criminal activities and shake investors’ confidence.

Wash trading – artificially inflates the trading volume of assets, and security in the market is becoming common in the crypto industry. In 2012, the “London Whale” case became famous because Bruno Iksil lost $6.2 billion, which was approximately 3x of the yearly budget of the Securities and Exchange Commission (SEC).

Wash trading is illegal and is mostly used by brokers to manipulate the market. Let’s explore some of the essential points of wash trading and money laundering as we move forward.

What is Wash Trading & Cryptocurrency?

Wash trading usually happens when a trader buys and sells securities multiple times to mislead investors about the asset’s liquidity and price.

According to Timothy Cradle, Blockchain Intelligence Group director of regulatory affairs, wash trading is when asset owners artificially boost prices to raise interest from other investors. The purpose is to give the liquidity illusion specifically.

Cryptocurrency, because of its pseudonymous transactions and decentralized nature, provides enough room to money launderers, so they deceive regulatory bodies, firms, and individuals.

4 Ways Depicting Relationship Among Wash Trading and Money Laundering

Wash trading is a deceptive tactic that security and asset owners use to manipulate the market, where an individual buys and sells the same asset. This technique will create the illusion of trading activity.

Case Scenario of Ponzi Scheme

Charles Ponzi made an all-time fake investment scheme, “Ponzi Scheme,” in which he paid current investors with the new investor’s money through wash trading and false promises of more returns in the NFT market. He scammed approximately $15 million by convincing Bostonians that he would make them rich quickly. For this purpose, he created an NFT project and promised to return all-time highs to his investors. Charles used wash trading to increase the NFT’s price and to attract new investors.

“I tried my hand at everything. From grocery clerk to road drummer. From sewing machine repair man to insurance salesman. From factory hand to kitchen and dining room help. In some of the jobs I lasted no time. In others, I lasted longer. Often, I would be fired. Oftener, I would quit of my own accord, either disgusted or to avoid being fired.”

Mr. Ponzi

This case highlights the following issues because money laundering is illegally earning, layering, and re-investing money:

Inflate Value of Assets and Securities

Wash trading has the potential to artificially inflate the asset and security value to increase its value.

Disguise Illegal Money

Wash trading conceals the source of illegal money because launderers make it difficult to track the accurate money source by creating false activities.

The Dark Side of Crypto’s Role in Wash Trading

• Decentralization in cryptocurrency makes it difficult for law enforcement agencies to manage financial transactions.
• Excessive usage of decentralized transfer and smart contracts makes financial transactions complicated.
• Since cryptocurrency is traded at an international level, transferring money across borders without any investigation is easy.
• People usually send transactions without their names, so it’s challenging to track the fund’s destination and source.
• Crypto is highly volatile in nature, so it can easily manipulate prices and true transactional value.
• High-risk countries lack law enforcement agencies, which makes it more complicated to identify and prevent illegal activities.

Why do People Layer the Source of Wealth?

Wash trading is a convenient technique for money launderers to inflate asset value and camouflage the source of illegal funds.

Inflate Trading Artificial Volume

Wash trade has the potential to artificially create hype for assets and securities. By doing so, no one can differentiate between legal and suspicious financial transactions.

Challenging Paper Trail

Multiple buying and selling of securities and assets make a complicated financial structure that is challenging to track and manage.

Manipulative Prices

Wash trading can easily manipulate prices because of complex financial structures and portray the illusion of real market activity.

How We May Help?

AML Watcher – a trusted cryptocurrency compliance partner, reduces financial crimes by recognizing suspicious activities in any crypto transaction.

For example, repetitive trades between large wallets and suspicious financial transactions. We analyze unusual spending habits, wallet addresses, transaction volumes, and price movements to detect wash trading in its early stages and identify potential risks.