Here's how Changpeng Zhao manipulated crypto prices, according to the SEC

False trading volumes, inflated prices: Binance was allegedly guilty of wash trading for years. Why this puts the entire crypto market at risk.

The allegation is serious: Binance CEO Changpeng "CZ" Zhao allegedly manipulated prices on his crypto exchange with his own market maker. This claims the SEC in its charge against Binance (from p. 65). The phenomenon is called wash trading. And it can shake confidence in the entire market.

To the outside world, Binance boasts the best security measures against such crimes. On-chain analysis tools, AI technology and human intelligence: Binance is safe from manipulation. Behind the scenes, things look different. In January 2021, a Binance employee wrote to her boss, Catherine Coley, that there is apparently nothing in place to prevent wash trading. She reported, "I just tested it myself, sold an order from my own offering." Catherine Coley is the director of BAM Trading, the operator of Binance.US.

More seriously, Sigma Chain, a market maker personally controlled by CZ, has been accused by the SEC of engaging in large-scale wash trading itself. In the first half of 2022 alone, Sigma Chain traded 48 of 51 newly listed assets. When COTI listed on April 6, 2022, it accounted for nearly 35 percent of the volume. In another instance, it was "99 percent of first-hour trading volume." By the end of the day, it was 70 percent. From one Sigma Chain account reportedly bought CZ yacht for US$11 million.

Why wash trading is so dangerous

"Allegations of wash trading against an organization or individual are worrying," attorney Joshua Klayman told Germany's BTC-ECHO. "Because they go to the heart of so many things: If you can't trust the trading volume or demand for an asset, it raises questions about price formation, market capitalization and liquidity. And even about the true size of an exchange." Ex-SEC attorney John Reed Stark takes the Binance case one step further: "It calls into question all the data related to crypto," he said. he tells Bloomberg.

Wash trading is considered a form of market manipulation and is punishable by law. In most cases, a person or company opens two or more accounts on a platform. People buy and sell assets for themselves to manipulate the price and distort liquidity and demand.

According to a report by the National Bureau of Economic Research, 70 percent of trading volume on unregulated exchanges is wash trading. A Forbes survey of 157 centralized exchanges also found that more than half of all Bitcoin transactions are wash trading. Billionaire investor and crypto fan Mark Cuban warned in an interview in January 2023: "The next crypto implosion will come from the discovery and removal of wash trading on centralized exchanges."

Binance shrouds itself in silence

So far, Binance has not issued a rebuttal, but has sharply denied all allegations. A question from BTC-ECHO remained unanswered. "We will fiercely defend ourselves," said it in an official statement. "The complaints present only one side of the alleged facts. We haven't heard the other side yet," warns Joshua Klayman. Binance is currently assembling a team of top lawyers to brace for a lengthy legal process.