How CZ allegedly manipulated cryptocurrency prices
2 min readThe accusation weighs heavily: Binance boss Changpeng “CZ” Zhao is said to have manipulated the prices on his crypto exchange with his own market maker. That’s what the SEC claims in its Charges against Binance (from p. 65). The phenomenon is called wash trading. And it can shake confidence in the entire market.
Outwardly, Binance boasts the best security measures against such crimes. On-chain analysis tools, AI technology and human intelligence: Binance is safe from manipulation. It looks different behind the scenes. “Apparently we have nothing to prevent wash trading?” a Binance employee wrote to his boss, Catherine Coley, in January 2021. She runs BAM-Trading, the operator of Binance.US: “I just tested it myself, sold an order to my own offering.”
Even more serious: Sigma Chain, a market maker personally controlled by CZ, is said to have itself carried out wash trading on a large scale, according to the SEC. In the first half of 2022 alone, Sigma Chain traded 48 of the 51 new listed assets. When COTI was listed on April 6, 2022, it was responsible for almost 35 percent of the volume. In another case, it was “99 percent of the first hour’s trading volume.” At the end of the day, the figure was 70 percent. CZ allegedly bought a yacht for eleven million US dollars from a Sigma Chain account.
Why wash trading is so dangerous
“Wash trading allegations against any entity or person are concerning,” told US attorney Joshua Klayman. “Because they go to the heart of so many things: when you can’t trust trading volume or demand for an asset, it raises questions about pricing, market cap and liquidity. And even the true size of an exchange.” Ex-SEC lawyer John Reed Stark even goes one step further in the Binance case: “It challenges all data related to crypto,” 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 one platform. You buy and sell assets to yourself to manipulate the price and simulate 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 study of 157 centralized exchanges also sees wash trading in more than half of all Bitcoin trades. Billionaire investor and crypto fanatic Mark Cuban warned in an interview in January 2023:
“The next crypto implosion will come with the discovery and removal of wash trading on centralized exchanges.”
Both Binance and CZ are silent for now
So far, Binance has not published a counter-statement, but has strongly denied all allegations. “We will fight back bitterly,” says an official statement. “The lawsuits present only one side of the alleged facts. We haven’t heard the other side yet,” told Joshua Klayman. Binance is currently assembling a team of star lawyers to prepare for a lengthy legal process.
