SEC’s new crypto suit alleges market-manipulating wash trading

Justin Sun, the creator of the Tron blockchain, is one of the most famous and least credible protagonists in the cryptocurrency industry. And now he has a new facet to his notoriety: allegations of market manipulation by the US Securities and Exchange Commission.

Why it’s important: Everyone has known for a while that a lot of crypto trading is fake, driven by big players looking to increase the value of their holdings. By taking on one of the most prominent faces in the industry, DC has shown that they are paying attention.

What they say: “While we are neutral on the technologies at issue, we are anything but neutral when it comes to investor protection,” Gurbir S. Grewal, of the SEC’s Division of Enforcement, said in a statement.

• “As alleged in the complaint, Sun and others used an ancient playbook to mislead and harm investors.”

Zoom in: The SEC’s complaint goes into detail and explains how various employees of three companies controlled by Sun were recruited in a so-called wash trading scheme.

• Wash trading is when an asset is traded back and forth in a market to make it look like there is demand, when really it’s one person – or pooling people – just sending the asset back and forth.

Be smart: Unregulated exchanges have little incentive to police wash trading, as the transactions earn trading fees, like all other trades.

• In a 2018 report, the SEC quotes one of Sun’s employees writing, “The boss reminded us of the need to increase trading volume, we need to increase the liquidity parameter next week, concentrate on binance, bittrex, bithumb, upbit exchange.”

Based on that quote, The laundry trading budget at the time was 2.5 BTC per day, or about $16,000 per day, at October 2018 prices.

• “During the 249 days that these accounts were active, Sun’s team engaged in at least 609,790 wash trades of TRX, an average of approximately 2,449 wash trades per day,” the complaint alleges, referring to the blockchain’s core token.

Meanwhile, it meticulously describes how Sun and his team were unequivocal in marketing TRX to the public in a way that created an expectation of profit.

• It is a key point in determining that a financial instrument constitutes a security under the SEC’s authority.
• The details include direct statements assuring buyers that it will go up in value.

Zoom out: If there’s one thing Sun and his team are known for, it’s marketing. He has a gift for drawing attention to himself and his projects.

• So it’s no surprise that the SEC also alleges that the companies encouraged celebrities to give inappropriate endorsements of the blockchain.

The Tron Foundation did not immediately respond to a request for comment from Axios.

Sun and Tron’s controversial history

When the Tron white paper was first proposed, it was immediate accused to lift text and key concepts from the language and materials used by other projects.

• Tron uses a delegated proof-of-stake consensus model, one that has proven susceptible to concentration of power on other blockchains.
• In fact, Sun quickly won an election to serve as one of the leading nodes almost immediately upon announcing his candidacy.

Tron’s War Christ was established in part via a $70 million initial coin offering. The treasury then expanded with a holding of the same coins stored for that sale, TRX.

In 2018, The Tron Foundation bought the company behind BitTorrent for a reported $120 million, changing its name to Rainberry and shedding many of its employees.

• BitTorrent is a peer-to-peer file sharing protocol that has been essential to how the web works behind the scenes, but has never made money for its creators.
• Shortly after, the Tron Foundation announced that it would create a new token called BTT to encourage more use of the network, which works better the more people see it with copies of data.
• The BTT token was then given pro rata to everyone who held TRX tokens on the Tron blockchain in a series of airdrops.

Of the note: It was just one of a number of campaigns the SEC describes, using this new token to increase interest in TRX.

Global reach

While the SEC lawsuit focuses on the use of US citizens as a way to establish jurisdiction, Tron has been mainly popular in Asia.

• By far the largest amount of Tether, the leading stablecoin popular with Asian traders, has been issued on Tron, with $43 billion running there.

Sun himself is a Chinese citizen, who became the World Trade Organization representative for the nation of Grenada in 2021.

• However, he has been active in the Tron ecosystem and crypto in general.

In-game status

Tron’s TRX token has fallen 12%, from $0.068 to as low as $0.058, making it one of the worst losers on an already bad day in the crypto markets (after the Fed rate hike).

• The BTT token is worth next to nothing, really, so it just dropped a bit.

Bottom line: The SEC is seeking a jury trial, but it’s worth noting that laundering charges in the past have sometimes resulted in criminal action.