Mark Cuban Warns of New Crypto Scandal and Potential Fraud

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The cryptocurrency industry over the past few months has been hit by numerous scandals, which have sharply increased skepticism and distrust among the general public and encouraged more calls for regulators to intervene.

A common aspect of all these crypto scandals is that the big names and players in the industry are getting splashed with the mayhem. No one is immune.

It all started last May when sister cryptocurrencies Luna and UST, or TerraUSD, crashed.

Both tokens crashed after the UST lost its peg to the dollar, with the foundation calling it a stablecoin. These cryptocurrencies are linked to more stable assets, such as the US dollar or gold. But UST was an algorithmic stablecoin, which was backed not by dollar reserves but rather by its sister asset, Luna.

This disaster caused a credit crunch that proved catastrophic for many companies, including hedge fund Three Arrows Capital, or 3AC, which found itself unable to meet payments to crypto lenders Celsius Network and Voyager Digital.

3AC was forced into liquidation. Celsius and Voyager have filed for Chapter 11 bankruptcy.

The depegging of Terra’s UST coin and the collapse of Celsius and 3AC resulted in massive losses for investors: $20.5 billion in the case of UST and $33 billion in the case of Celsius and 3AC, according to blockchain security firm Chainalysis.

Factors: cross-exposure and lack of transparency

This crisis mainly revealed the ties and exposure of crypto companies to each other, like banks during the 2008 financial crisis. The other lesson was the lack of transparency of centralized crypto companies, which are for the mostly unregulated.

This opacity created another situation that would cause the overnight implosion of FTX a few months later.

The cryptocurrency exchange and its sister company, Alameda Research, a hedge fund that doubles as a trading platform, became the companies through which their founder, Sam Bankman-Fried, profited from the crisis of confidence in the world. crypto industry. He consolidated power and became the new strongman in the crypto space.

Bankman-Fried used both companies to bail out other troubled businesses, but as will become apparent later, some of those deals were questionable, like the one with lender BlockFi. Less than three months later, the Bankman-Fried empire went bankrupt.

Regulators accused the former trader of defrauding and conspiring to defraud FTX customers and investors. It will take time to determine exactly what happened, but FTX client funds appear to have been mixed with Alameda and used illegally in high-risk transactions.

Bankman-Fried pleaded not guilty.

According to Chainalysis, the fall caused $9 billion in losses for FTX clients, but this figure does not take into account potential losses for people who deposited their funds with the exchange. The likelihood of these investors getting them back is unclear.

Cuban sees a scandal linked to the washing professions

As 2023 begins, the question is whether in this new year the crypto industry will also be marked by scandals.

For billionaire and cryptocurrency investor Mark Cuban, it’s a matter of when, not if.

This new scandal, he says, will manifest itself in the form of the implosion of the so-called washing trades, according to him, on the centralized exchanges.

“I think the next possible implosion is the discovery and removal of fictitious trades on central exchanges,” the Dallas Mavericks owner told TheStreet in an email interview. “There are supposedly tens of millions of dollars in transactions and cash for tokens that have very little use. I don’t see how they can be so liquid.”

He warned: “I have no details to offer to back up my guess.”

A wash trade, an illegal practice, consists of creating an artificial interest around a financial product – a crypto token or a coin in this case – to make a profit. This form of pump-and-dump scheme is prevalent in the cryptocurrency industry.

Basically, a scammer/trader is buying and selling the same tokens, creating artificial trading volumes around that cryptocurrency. The scammer encourages positive comments on social media about the token, giving other traders the impression that the token is popular and in high demand. This, in turn, generates more interest in the token, driving up its price. The scammers then liquidate their positions at the peak of demand.

“Wash Trading enters into or purports to enter into transactions to create the appearance that purchases and sales have been made, without incurring market risk or changing the trader’s position in the market,” says the U.S. Commodity Futures Trading Commission.

Bitcoin is not immune to washout transactions

While plenty of washouts have taken place in traditional finance, the crypto space is particularly ripe for the practice as nearly 13,000 cryptocurrencies are listed, according to data firm CoinGecko. Scammers need to make one or another token stand out from this pack so that they can engage in the washing trade.

For example, according to a 2022 study by Forbes magazine of 157 centralized cryptocurrency exchanges, more than half of bitcoin trading volumes are fake.

“More than half of all reported transaction volumes are likely fake or uneconomical,” the magazine concluded, adding that it “estimates the industry’s global daily bitcoin volume to be $128 billion on the 14th June. That’s 51% less than the $262 billion you’d get when taking the sum of self-reported volume from multiple sources.”

Consider the figures from various data companies regarding bitcoin trading volumes. At last check, CoinMarketCap pegs the latest 24-hour bitcoin trading volume at $15.8 billion, CoinGecko at $17.6 billion, Nomics at $26.14 billion, and Messari at $3.52 billion. of dollars.

These disparate numbers show that even the most reputable research firms don’t have the same data on bitcoin, the top cryptocurrency by market value.

This suggests that opacity is the key word and raises even bigger questions about data regarding trading volumes of less popular and less exposed cryptocurrencies.

And this question in turn raises that of the solvency of certain centralized cryptocurrency exchanges. More than 560 exchanges are operating, according to CoinGecko.

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