Former Goldman Sachs engineers are trying to increase integrity in the crypto market.
Solidus Labs have raised 3 million dollars, and want its machine-learning based trade surveillance platform to work towards this cause. Specifically for digital assets, the company’s platform is being deployed by exchanges, brokers, market-makers and hedge funds in the U.S and Europe.
A universal obstacle for lawmakers, yet one that largely goes unmentioned, is the manipulation present in cryptocurrency exchanges. Figures from a Blockchain Transparency Institute report indicated in December 2018 that over 80% of the top 25 cryptocurrencies listed on CoinMarketCap are dependent on manipulated volume and prices.
Regulators including the SEC are aware of this deception, and they have made it clear that certain milestones would never be reached until the problem was fixed. The approval of a Bitcoin ETF is among these milestones, positioning the resolution of the manipulation crisis as one of the industry’s most attractive targets.
Bitcoin and other cryptocurrencies have hit a regulatory wall in 2019, as numerous countries come down on ideas that have had relatively free reign. In the US, the SEC has responded to fraud concerns by casting a wide net over ICOs while at the same time imposing rules on cryptocurrency exchanges.
Cryptocurrency markets and financial instruments have exploded onto the financial scene in a mere handful of years, and now regulators are forcing them to mature before spreading further. Manipulation is just a piece of the puzzle, but it is one that cannot be addressed by regulators as much as authorities within the industry.
"Digital assets bring new layers of intricacy to trading systems," says Asaf Meir, CEO of Solidus, “which means different kinds of data, operational needs, new manipulation schemes, and evolving regulation that legacy surveillance systems are unable to sufficiently accommodate for.”
Manipulation prevention and its growing niche are one component of a broader self-regulation strategy, which has responded to scrutiny by carving a path towards compliance from within. Another company addressing manipulation is Neutrino, which was just acquired by Coinbase to help make the activity on its exchange platform more transparent.
Neutrino’s enhanced ecosystem for digital assets trading includes faster and more thorough KYC and AML checks, red flagging suspicious origins of or destinations for funds, dubious dark net behavior, and more in-depth intelligence gathering about how cryptocurrencies flow through the ecosystem.
While these companies chip away at manipulation, leading exchanges have tackled the issues that regulators identified with ICOs by offering Initial Exchange Offerings (IEOs). IEOs hope to receive stamps of compliance on their supervised token issuance methodologies, and therefore to become a type of assembly line for new blockchain companies, many of which are waiting in the wings given new guidelines from the SEC.
As exchanges must also obey new rules about collecting and reporting data for KYC, AML, and tax purposes, the market is seeing a mass effort by the industry to patch up numerous holes that regulators have poked. Cryptocurrency must be airtight and spotless from all angles before it is allowed to flourish and fully integrate with traditional markets, and the gauntlet thrown by regulators is best answered by leading digital asset firms that can build sturdy trading foundations and herd users to them. Though regulators have provided them templates to self-regulate, these measures are for the present and don’t mean that bolder rules won’t appear.
FINRA and the SEC have already indicated that in 2019 digital assets will be a priority for audits and inspections, and Congress is currently reviewing legislation to directly combat manipulation. Incoming laws against manipulation, concrete definitions for assets, and clear instructions for IEO compliance could land at any time. It’s vital for the cryptocurrency industry to be as ready as possible before this happens. Ideally it can reach maturity on its own steam, and be declared ready for the next step, but in the worst case it will be prepared to adapt quickly to new requirements.
Today’s efforts at self-regulation in places identified by regulators are therefore logically receiving an abundance of attention, because they’re already working to “clean up” the market before it becomes mandatory. Anti-manipulation and data intelligence platforms, if they don’t become a de facto component of compliance, are able to quickly pivot to accommodate new rules, helping the industry accelerate towards more sustainable growth.
