Crypto Assets market makers suspected of market manipulation have been penalized by regulators

Recently, a market maker in the Crypto Assets market headquartered in the UAE was severely punished by regulatory authorities for alleged market manipulation. The company was accused of engaging in wash trading for a Crypto Asset named "NexFundAI" between August 23 and September 18, 2024, artificially creating false trading volumes with the intent to induce investors to buy. Regulatory authorities determined that "NexFundAI" falls under the category of securities, and such actions violate the anti-fraud and market manipulation provisions of relevant securities laws.

The investigation shows that this market maker conducted 740 wash trading transactions using 30 different wallet accounts, creating nearly $600,000 in false trading volume, accounting for 98% of the total trading volume of the asset during the same period. These trades were primarily driven by algorithms and automated programs, with the aim of creating a false impression of market activity to attract retail investors. Even more surprisingly, this market manipulation was actually a so-called "market service" actively hired by the "NexFundAI" project party, with the market maker profiting from it while the project party and investors suffered losses.

Regulatory Actions and Penalty Results

On October 9, 2024, regulators filed a civil lawsuit against the market maker and one of its employees. At the same time, local prosecutors also initiated criminal proceedings against the involved individuals, accusing them of market manipulation and wire fraud. This enforcement action is an important part of the law enforcement's effort to combat illegal activities in the Crypto Assets market.

On April 7, 2025, the civil case reached a final judgment, and the market-making company was required to:

1. Pay a civil penalty of $425,000, as well as $3,000 in illegal gains and $80.39 in pre-judgment interest;
2. Ensure that all of its customers are non-U.S. individuals or entities within 30 days, implement compliance policies within 45 days, and submit compliance reports annually for the next three years.
3. If fines are paid in a criminal proceeding, they can be used to offset part of the civil penalties.

The specific penalties for the employees involved have not yet been announced and may still be addressed in the criminal litigation process. This case is seen as one of the landmark enforcement actions by regulatory agencies in recent years against manipulation in the Crypto Assets market.

The chaos of market makers in the crypto assets market

The wash trading behavior revealed in this case is merely a microcosm of the improper conduct of market makers in the encryption market. In addition, there are potential issues in the industry such as the "loan option model". In this model, market makers borrow tokens from project parties to provide liquidity, but certain unscrupulous market makers may abuse this mechanism:

• By massively selling borrowed tokens to lower the price, triggering panic selling, and then buying low to profit;
• Utilize the option clause in the contract to repay the tokens at a low price, maximizing one's own interests;
• Utilize information asymmetry to induce inexperienced project parties to sign unfavorable contracts.

These actions may have a devastating impact on small projects, leading to a crash in token prices, a collapse of community trust, and even the risk of delisting from exchanges.

Learn from traditional financial experience

In the face of similar market manipulation issues, traditional financial markets have established relatively mature regulatory and transparency mechanisms, which are worth referencing for the crypto market:

1. Strict regulation: restrict naked short selling, prevent malicious price manipulation, and severely punish market manipulation behaviors.
2. Transparency of information: Requires public disclosure of transaction data and reporting of large transactions to reduce the space for opaque operations.
3. Real-time Monitoring: Use algorithms to monitor abnormal transactions and implement a circuit breaker mechanism to prevent panic from spreading.
4. Industry Standards: Establish ethical standards and qualification requirements for market makers.
5. Investor Protection: Provide class action and investor compensation mechanisms.

These measures together build a multi-layered market protection system, effectively constraining the behavior of market makers in traditional markets. If the Crypto Assets market can learn from these experiences and establish a sound regulatory framework and market mechanism, it will help enhance market fairness and investor confidence, promoting the long-term healthy development of the industry.