The Manipulation of Cryptocurrency Markets and Market Makers
Prohibition and Limited Permission of Market Manipulation
In South Korea, the Capital Markets Act prohibits market manipulation.
- In stock markets, thinly traded stocks with wide bid-ask spreads are vulnerable to sharp price fluctuations with minimal trades.
- To counteract this, market makers stabilize prices by narrowing bid-ask spreads and preventing extreme volatility.
What is a Market Maker?
Market makers are entities permitted to manipulate trading volumes legitimately to stabilize stock prices.
- The Capital Markets Act allows their interventions to fulfill this objective.
- Thanks to this system, stable stock prices are maintained except during unusually large-scale trades.
Market Makers in Cryptocurrency Exchanges
Cryptocurrency markets also have market makers.
- Initial listing prices of tokens are set by exchanges, and subsequent prices are determined through user trading.
- Early post-listing stages often see significant bid-ask gaps, causing sharp price swings. Market makers intervene to address this volatility.
Unlike stock markets, the crypto industry lacks legal regulations for market makers.
- Crypto exchanges often charge listing fees that include market-making costs to artificially create liquidity and stabilize new token prices.
- However, South Korean prosecutors view such practices as manipulative.
Cases Related to Market Making in Crypto Exchanges
- The Upbit Case
The "Upbit wash trading allegation" is a notable case that highlights the legal stance on market making in crypto exchanges.
- Prosecutors indicted Upbit representatives in 2018 for market manipulation.
- Lower courts acquitted them, emphasizing the absence of specific regulations on liquidity provision.
- However, in appellate courts, procedural issues invalidated crucial evidence, leaving detailed judicial examination of market making unaddressed.
- The Coinone Listing Scandal
The Coinone listing scandal involved brokers bribing Coinone to list certain cryptocurrencies.
- They inflated trading volumes and prices to lure investors before offloading at peak prices.
- The court identified these activities as manipulative rather than legitimate market making, leading to convictions.
Future Regulation: The Virtual Asset User Protection Act
The recently passed Virtual Asset User Protection Act, set to take effect on July 19, 2024, introduces penalties for market manipulation under Article 10.
- Similar to stock market mechanisms, crypto markets may also benefit from regulated market makers to stabilize prices.
- However, clear standards for who qualifies as a market maker, and how they should operate, remain undefined.
Conclusion
While the crypto market currently operates in a legal grey area regarding market making, the new law is an opportunity to establish robust legal frameworks. Addressing market manipulation under the guise of market making can enhance market stability and investor trust.
