Expert warns of new crypto scandal and fraud

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While the year 2022 was the beginning of the collapse of crypto Ponzi rackets, according to billionaire investor Mark Cuban, a new scandal will soon rock the entire crypto world.

With the 2022 collapse of fraudulent crypto exchange FTX and arrest of Sam Bankman-Fried (SBF), this scam venture has been hit by numerous scandals, which for obvious reasons have sharply raised skepticism and mistrust among the general public and encouraged more calls for regulators to step in.

One aspect common to all these crypto scandals is that the big names and players in the sector get spattered by the mess. No one is immune.

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

The two tokens crashed after UST lost its peg to the dollar, the foundation qualifying it as a stablecoin. Such cryptocurrencies are tied to more stable assets, like 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 firms, including hedge fund Three Arrows Capital, or 3AC, which found itself unable to honor its payments to crypto lenders Celsius Network and Voyager Digital.

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

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

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

This opacity created another situation that would cause the overnight implosion of FTX a few months later. FTX and its sister company, Alameda Research, a hedge fund that also serves as a trading platform, became the companies through which their founder, Sam Bankman-Fried, took advantage of the crisis of confidence in the crypto industry. He consolidated power and became the new strongman of the crypto space.

Bankman-Fried used the two companies to save other struggling firms, but as would come clear later, some of these deals were questionable, such as 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 clients and investors. It will take time to determine exactly what happened, but FTX customer funds appear to have been comingled with Alameda’s and were illegally used in high-risk transactions.

Sam Bankman-Fried has pleaded not guilty.

According to Chainalysis, the downfall has caused US$9 billion of losses for FTX clients, but this number doesn’t take into account potential losses for people who deposited their funds with the exchange. The likelihood of these investors recovering them is uncertain.

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

For the billionaire and cryptocurrency investor Mark Cuban, it’s a question of when, not whether.

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

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

He cautioned: “I don’t have any specifics to offer to support my guess”.

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

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

“Wash Trading (is) entering into, or purporting to enter into, transactions to give the appearance that purchases and sales have been made, without incurring market risk or changing the trader’s market position”, says the US Commodity Futures Trading Commission.

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