Protecting new currency from old-school market manipulation

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Crypto may be touted as a new currency, but it’s still vulnerable to the same types of market manipulation that sometimes plague traditional financial institutions.

To root out potential abuses in digital currency markets, cryptocurrency exchanges are adopting surveillance tools to demonstrate they can provide the security and rules that regulators and banks want to see.

Gemini Trust, the digital-asset exchange founded by Cameron and Tyler Winklevoss, started working last year with Nasdaq’s market surveillance tools to protect itself from pump-and-dump schemes, insider trading and bogus crypto orders, known in the industry as layering. Other exchanges are now similarly bolstering their operations through companies and products that are a staple with traditional financial institutions.

The crypto finance firm Circle, which built a reputation on its popular bitcoin wallet, is now using market surveillance software from the anti-fraud provider NICE Actimize to track anomalies on its Poloniex crypto exchange.

“We believe this customer-centric focus on safety and transparency will help Circle and its customers and is the right direction for the industry as a whole,” Gus Coldebella, Circle’s chief legal officer, said in an email.


Poloniex generates $300 million in monthly trading volume from crypto investors, according to Circle.

NICE’s software analyzes information from the exchange to find hints of any market wrongdoing. If the software finds an anomaly, it creates an alert that flows into a case management system. Circle then analyzes alerts based on different risk scores and would start an investigation to determine if fraud is occurring on the exchange.

Cromwell Fraser, a subject matter expert in financial markets compliance with the software firm, said the surveillance program works in much the same way as it would with traditional financial institutions.

“We’ve been analyzing this sort of behavior for many years,” Fraser said. “It’s not a stretch for us to take what we’ve learned from" traditional financial institutions "and the best practices from there and adapt them to this market.”

The scope of market manipulation on crypto exchanges came to light last year when The Wall Street Journal found that dozens of trade groups manipulated the price of certain digital tokens to the tune of $825 million in trading activity over a six-month period. The Journal said it found 175 pump-and-dump schemes involving 121 different crypto coins.

Such schemes were already happening on a smaller scale, noted Ariel Zetlin-Jones, associate professor of economics at Carnegie Mellon University's Tepper School of Business. He referenced a situation in late 2013 when suspicious activity from a single person was likely responsible for a sudden rise in bitcoin’s price from $150 to over $1,000 in a two-month period. Naturally, regulators are closely monitoring market manipulation on crypto exchanges.

Securities and Exchange Commission Chairman Jay Clayton said last year he wants to see better market surveillance before approving a bitcoin ETF.

"What investors expect is that trading in the commodity that underlies that ETF makes sense and is free from the risk of manipulation," Clayton said at November’s Consensus Invest Conference. "It's an issue that needs to be addressed before I would be comfortable."

Clayton pointed to the surveillance tools put in place by the New York Stock Exchange and Nasdaq to protect those exchanges. In addition to Gemini, Nasdaq also works with SBI Virtual Currencies and a couple of unnamed exchanges. Fraser said NICE is in discussions with other exchanges to use its software.

The exchanges’ efforts to root out crypto market manipulation dovetail with those occurring at the legislative level. In December, the virtual Currency Consumer Protection Act of 2018 and the U.S. Virtual Currency Market and Regulatory Competitiveness Act of 2018 were introduced to Congress in part to address crypto market manipulation.

If the Circle and NICE partnership “is able to demonstrably protect Circle's assets, I imagine that we will see industry participants follow Circle's lead in an attempt to attract new capital to cryptocurrency markets,” Zetlin-Jones said.

Coldebella said Circle will initially use NICE’s software for the Poloniex exchange, which the company acquired last year for $400 million.

“We're initially focused on Actimize's uses on Poloniex, though we'll assess whether it offers benefits to customers on other platforms,” he said.

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