What is Wash Trading?

Wash Trading is a situation in which a trader or investor buys a stock several times in a short period and thus tries to deceive other market subscribers about the value or liquidity of capital.

In this article, we are going to talk about wash trading and its examples in the cryptocurrency market, especially the market for non-exchangeable tokens or NFTs.


What is wash trading?

Wash trading is the buying and selling of a fixed asset in a short period. Traders use wash trading as a market manipulation technique to influence the business activity and the price of capital. Typically, one or more members collude with each other to make a set of trades regardless of market risks, so that the initial position of the other members will not change.


An example

In October 2021, the Larva Labs NFT project called Cryptopunks witnessed a similar phenomenon to the Wash Sale in the Ethereum blockchain, which resulted in the CryptoPunk 9998 digital currency worth 124,457 ether (ETH). The Ethereum tokens used to purchase this NFT was transferred to the seller and then returned to the buyer’s account. These tokens were used to repay a loan that the buyer had borrowed from Larva Labs to purchase the NFT digital blockchain. This measure is not only considered an example of an instant loan (Flash loan) but also can be considered an example of money laundering in the NFT market.


Why do people wash trading?

Several reasons can be attributed to the tendency of traders or factories to wash trading; For example, these goals may include encouraging members to buy to raise prices or encouraging them to sell to reduce the value of capital (NFT). Traders may try to repay the Wash Sale at a lower price to lock in stock losses before repurchasing capital, thereby seeking tax refunds.


How does wash trading work?


the participants in this business go hand in hand so that Wash Trading can achieve its main goal. The money laundering business occurs when an investor buys and sells fixed capital tokens at the same time. On the other hand, it goes one step further and invests the goal or intention of the transaction and the result of the transaction of both.

These people have to buy and sell common assets in a short period. Ownership is given to accounts held by a particular person or company.


They usually pay special attention to the law that is done between jointly owned accounts. Because it can be effective. However, wash trading is not always really needed, and it happens when investors seem to put deals on paper and present them and have no assets.


Why is wash trading illegal?

Trading in traditional financial transactions is prohibited, but whether or not it is legal in the decentralized realm of non-exchangeable tokens or NFTs is still debatable. Although there are no specific rules and classifications for NFTs, some governments oppose this practice; Bithumb, a South Korean currency exchange, for example, was fined in 2018 for facilitating more than $ 250 million worth of phony trading.

On April 5, 2022, Bloomberg reported that data from CryptoSlam, an NFT tracker, showed that Wash Trading accounted for $ 18 billion, or 95% of the total trading volume in the LooksRare NFT market. Although wash trading is banned in some jurisdictions, the decentralized structure of currencies makes it difficult to track down criminals.


How are NFTs used for money laundering?

NFT-related offenses, such as money laundering and scams resulting from money trading, occur when NFT sales target addresses that are “self-financing”. Money laundering has long been a serious problem in the art world, and the reason can be easily understood. Many people wonder if NFTs can be laundered similarly because of their history and nickname “crypto” for foreign exchange assets, can the money be laundered through NFTs?


Yes. Scammers, malware operators, and the Chateaux crypto bank use NFTs to launder money. Chex is a cryptocurrency bank that aims to make digital currency transactions simple, secure, and accessible to many customers while maintaining superior performance over traditional banking systems.

In the algorithm below, you can see the names of criminals who use the purchase of NFTs for money laundering.




In this article, we talked about Wash Trading in the foreign exchange market, and in particular the market for non-exchangeable tokens (NFTs). If you want to have a say in the capital market and avoid the risks in this area, you need to know the strategies that fraudsters use to deceive other currency users. In this case, you can find your way in the digital currency market with the right and calculated financial decisions and achieve profitability and success.

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