(Bloomberg) – A digital art by Beeple broke records at auctions on Thursday, when it was sold at Christie’s for $ 69 million. Twitter Inc. co-founder Jack Dorsey is auctioning the non-fungible token for the first tweet of all time, “just configuring my twttr”, with the highest bid hitting $ 2.5 million so far. The highlights of LeBron James are bringing six digits.
If you didn’t know it at all, digital assets are growing, with buyers paying for so-called NFTs that give them exclusive ownership of electronic tchotchkes. It is not difficult to find explanations as to why, say, a GIF of a cat with a rainbow trail commands the rescue of a king. The most prosaic theories say that the price per pixel is rising as Bitcoin and other cryptocurrencies create new millionaires every day and the newly wealthy digital natives seek to spend on their adopted domain. And for sure, it can be as simple as an old craze around the last shiny object that caught people’s attention.
But there is also a nefarious suggestion appearing on forums, Twitter and blogs that attribute at least part of the price hike to washing the trades. It is when a broker or group of brokers buys and sells the same asset to create the illusion of high demand.
The claim is not new: the laundering trade has been called an “open crypto secret” and concerns about its prevalence have been chasing the space for years. The U.S. Securities and Exchange Commission, in a 2019 response to a request from a Bitcoin-listed fund, cited “fraudulent and manipulative activity” in the market as a reason for rejection.
In a world where identities are abstractions with about 30 alphanumeric characters that represent the address of a hidden person’s digital wallet, claiming that wash trading is both plausible, but almost impossible to prove. Except for the most blatant of acts, in which two accounts exchange repeatedly with each other, the identification of the autonomous transaction requires forensic accounting tricks, such as employing Benford’s law or analyzing the size distributions of transactions according to the mathematical principles established as Pareto -Levy.
“Today, crypto exchanges are not regulated as much as normal exchanges, where wash trading is clearly prohibited by regulators,” said Matthieu Soule, head of BNP Paribas C.Lab Americas, the bank’s innovation workshop. “This means that today’s investors need to rely on the platforms on which they are transacting to ban and monitor these laundering practices.”
For its part, Nifty Gateway, one of the largest NFT exchanges in volume, claims to be on the lookout for questionable transactions on its system.
“To date, we have seen no evidence of wash trading on our platform and we monitor sales for abnormal activity,” wrote a Nifty Gateway spokesman by email. “Most of our customers buy Nifties with credit cards, which requires them to provide some personally identifiable information and limit the risk of laundering negotiation.”
Still, there are signs that there is some truth to the story of the boogie man who negotiates laundry.
In a clear case, NonFungible.com analysts identified a Blockchain Cuties character that two accounts swapped back and forth over the course of a day.
More extensive research was done by two groups of academics with a focus on cryptocurrency exchanges. Although neither looked specifically at the NFT markets, the two believe that their research is applicable and that illicit transactions may also be present there.
Will Cong, associate professor at SC Johnson College of Business at Cornell University and one of the authors of an article that claims to have detected abnormal trading patterns in unregulated cryptocurrency exchanges, said he did not see a big difference between incentives to launder trade in markets. currency and NFT.
“Detecting fraud is difficult,” said Cong. “Even if they are all non-fungible, they are still anonymous and it would be difficult to track market manipulators.”
In another study, two researchers at the Technical University of Berlin wrote that decentralized exchanges where many cryptographic assets and tokens are traded are “prone to manipulative behavior”.
“Each interaction takes place in a chain and is done with an account whose creation is virtually free,” said Friedhelm Victor, author of the Berlin newspaper. “It is very easy to create multiple accounts and trade with yourself.”
But Victor warns that the high transaction fees on the Ethereum blockchain make wash trading a losing proposition.
“It is so expensive at the moment to execute a transaction, for fungible tokens it is probably not attractive to do so now,” said Victor. “This could change in a bear market” or as updates to the Ethereum blockchain, which will make it cheaper to launch transactions.
Victor’s sentiment is echoed by Tom Robinson, chief scientist and co-founder of Elliptic, a blockchain data tracker.
“The NFT laundering operation is unlikely because the negotiations are taking place in public and transparent blocking chains for everyone to examine,” said Robinson. “In addition, transaction fees on blockchains like Ethereum are very high, making this activity prohibitively expensive.”
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