The next crypto implosion could be uncovering laundering

Billionaire Mark Cuban believes an age-old market manipulation tactic could be the next thing to shake up the cryptocurrency industry.

“I think the next possible implosion is the discovery and removal of wash trades on central exchanges,” the longtime crypto investor tells TheStreet.

A wash trade is when a trader buys and sells the same financial asset multiple times to generate false volume and make it look like there is high demand for the asset. This artificially inflated demand can mislead other traders into investing real money in the asset.

Since higher demand typically leads to higher prices, traders can use this process as a type of “pump-and-dump” scheme: When the price is as high as the trader thinks it can go, they can withdraw money and let other investors sit in . the asset that decreases in value.

Although money laundering has been illegal in traditional US financial markets for decades, cracking down on activity in the crypto space is likely to be difficult.

“Putting an exact figure on crypto-washing trading is much more difficult than in traditional finance because the markets are so diverse and decentralized,” says Chen Arad, CEO of Solidus Labs, a crypto-native risk monitoring and market monitoring company.

For example, bitcoin is traded across thousands of platforms that are both centralized and decentralized, regulated and unregulated. This could create new openings for criminals to collaborate across exchanges and manipulate the market in new and sophisticated crypto-native ways, Arad told CNBC Make It.

To that point, just over 50% of daily bitcoin trades reported are likely fake, according to Forbes’ latest analysis of 157 crypto exchanges worldwide. For the study, Forbes analyzed data from four crypto media firms – CoinGecko, Nomics, Messari and CoinMarketCap – as well as several crypto exchanges.

Although Cuban cautioned that he had no details to back his prediction, he pointed out that there are supposedly tens of millions of dollars in trades for digital tokens that have very little leverage, and he doesn’t see how these types of assets can be so easily converted into cash.

Arad agrees that laundering is a big topic within the cryptocurrency market. “Without preventing money laundering, crypto will never fulfill its potential to enable safer and more accessible financial services,” he says.

Unfortunately, discovering laundry trades on your own is no easy feat. Identifying market manipulation requires specialized technology and deep technical, financial and crypto expertise, says Arad.

But it is important to note that the crypto industry has made a concerted effort to combat the problem over the years, he says.

“Most regulated exchanges have compliance and monitoring teams larger than in traditional finance and led by expert veterans,” says Arad. “On exchanges that use market monitoring, the frequency of wash trading is often only a fraction of a percent.”

The best thing retail investors can do to protect themselves from falling for a wash trading scheme is to ensure they only trust regulated crypto platforms that use market monitoring technology to detect suspicious trading activity, he says.

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