In traditional markets, regulators have ensured that there are systems in place to monitor, investigate and identify market manipulation efforts with a view of prosecuting individuals involved. In an ideal situation, markets need to be competitive where there are many buyers and sellers so that no single player can dictate or influence prices. This helps in creating public confidence, to increase trade and efficiency in transactions. But this is not always the case. Due to the urge to make super profits in the crypto space, market players have used numerous manipulation methods to fulfil their needs making it an uneven playing field.
The Trading Gap
In the nascent cryptocurrency market, price manipulation is increasingly becoming an issue of concern and systems need to be put in place. Since the market does not have a regulation on market manipulation, there are contradicting reports from various stakeholders on this matter. It is important to note that Nasdaq has claimed that its market surveillance system is already being used in several cryptocurrency exchange platforms.
A report released by the New York Office of the Attorney General though noted that many cryptocurrency trading platforms are vulnerable to the vice as they have not put in place critical market surveillance systems. Although some cryptocurrency trading platforms do not agree with the report, this has not stopped the US department of Justice from investigating whether Bitfinex and Tether pushed Bitcoin prices up.
As a result of these grey area in regulation, US congressmen introduced two bipartisan bills in 2018 to prevent crypto price manipulation and boost acceptance of the blockchain technology. The 2018 Virtual Currency Consumer Protection Act aims to explore how market manipulation happens in the cryptocurrency space, the impact it has on investors and the role of regulation in preventing the vice.
Additionally, the Act aims to propagate growth in the US industry by researching crypto regulations around the world and recommending changes to current regulations. The US congressmen say the reason behind introduction of the two bills is the fact that blockchain technology and virtual currencies have the potential to become important drivers of the US economy and thus must be supported.
This move is largely seen as an improvement to the status quo. When it comes to market manipulation, clarity in regulation will ensure the vice is eradicated in cryptocurrency space in the US because stakeholders will read from the same page with the aim of improving investor protection.
Agreeing to this, Joseph Oreste, founder and CEO of Qupon says, “I think the best part about these two bills is that they signal to institutional investors and consumers that government is accepting cryptocurrency and actively looking for ways to contribute to its security and adoption. Creating consumer protections convey to the public that the technology is being monitored for bad actors and is therefore safe for use. Exchanges are the gateway to crypto and therefore a critical infrastructure to the technology. Regulation and oversight signal to institutional investors sufficient safeguards are being put into place to begin investing. The bills are exploratory, however it is another positive step in the right direction.”
The public will no doubt react positively to these measures as one barrier to entry into the market is removed. Improvements in the regulatory environment as a result of the second bill will attract investment in the industry and propagate industry growth. This will place the US in a position to challenge already established economies in the space.
*Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.