The Chainalysis 2025 Crypto Crime Report has revealed troubling signs of market manipulation in the decentralized finance (DeFi) sector, with suspected wash trading accounting for up to $2.57 billion in trading volume across Ethereum, BNB Smart Chain (BNB), and Base blockchains in 2024. This fraudulent activity misleads investors, distorts market transparency, and creates an unfair trading environment.
Understanding Wash Trading and Its Impact
Wash trading involves artificially inflating trading volume by repeatedly buying and selling the same asset. This creates a misleading perception of demand and liquidity, tricking traders into believing that an asset is actively traded and popular. Unlike centralized exchanges (CEXs), where regulators can impose strict controls, DeFi operates in a more pseudonymous and decentralized manner, making it harder to detect and regulate fraudulent trading activities.
⑥ Wash trading:
— ardizor 🧙♂️ (@ardizor) July 3, 2024
Wash trading is a market manipulation technique where traders artificially inflate an asset's value by increasing its trading volume. A wash trader typically moves crypto between wallet addresses or exchange accounts they control to create the illusion of high… pic.twitter.com/uzSTEkcyj5
Wash trading distorts asset prices, gives an unfair advantage to certain market participants, and can artificially influence token rankings on crypto analytics platforms. The widespread nature of this practice underscores the urgent need for better surveillance tools and regulation in the DeFi space.
Chainalysis Heuristics for Identifying Wash Trading
Chainalysis applied two primary heuristics to detect potential wash trading across blockchain networks:
- Matched Buy and Sell Transactions
- Addresses that executed a buy and sell transaction within 25 blocks (approx. 5 minutes).
- The difference between transaction volumes in USD was less than 1%.
- Addresses that completed at least three such trades within the study period.
- Findings: This heuristic identified $704 million in potential wash trading, with about 23,436 unique addresses engaging in this activity. The data also showed that traders often used multiple addresses to bypass detection mechanisms.
- Disperse-Based Detection
- Addresses that distributed funds to five or more managed addresses.
- Managed addresses that received their initial deposit via multi-sender applications.
- The difference in total buy and sell volume was less than 5%.
- Findings: This heuristic detected $1.87 billion in suspected wash trading, with certain controller addresses facilitating over $142.99 million in January 2024 alone. These addresses systematically manipulated token prices, misleading market participants.
By combining both methodologies, Chainalysis determined that suspected wash trading activity totaled $2.57 billion, potentially accounting for a significant portion of crypto market manipulation in 2024. These findings illustrate the scale of the problem and the need for further investigation.
Regulatory Response and Law Enforcement Actions
Wash trading has caught the attention of global financial regulators, leading to increased scrutiny and legal actions. In October 2024, the U.S. Securities and Exchange Commission (SEC) charged four major market makers—ZM Quant, Gorbit, CLS Global, and MyTrade—for conducting fraudulent wash trading operations.
The Internal Revenue Service (IRS) later reported that 18 individuals and entities had orchestrated international wash trading schemes, operating across the U.K. and Portugal.
Case Study: Volume.li Trading Bots and Wash Trading Manipulation
Chainalysis uncovered a real-world example of wash trading via Volume.li, a service that sells automated trading bots designed to artificially inflate token volume on decentralized exchanges. This service allows customers to purchase trading bots capable of executing thousands of transactions in rapid succession to create the illusion of liquidity.
For instance, one trading bot generated 10,341 artificial buy-sell transactions for the Donald J. Chump token, boosting its total Uniswap trading volume by 43% within five days. These activities illustrate how easily market participants can exploit loopholes in the DeFi ecosystem to manipulate token performance and mislead investors.
Pump-and-Dump Schemes: Another Form of Market Manipulation
Beyond wash trading, the Chainalysis report highlights the rise of pump-and-dump schemes, where bad actors artificially drive up token prices before selling off their holdings at inflated prices, leaving unsuspecting investors with worthless assets.
In 2024 alone, Chainalysis found that 4.52% of newly launched tokens—approximately 137,158 tokens—displayed characteristics consistent with pump-and-dump scams. The report found that:
- 89% of manipulated DEX pools were abandoned by the same address that created them.
- Most pump-and-dump schemes unfolded within 6-7 days before being abandoned.
- The most extreme cases lasted over four months, showing that some scammers operate long-term fraudulent schemes.
The Need for Greater Transparency and Regulation
With an estimated $2.57 billion in wash trading volume, the report highlights the growing concern of market manipulation in the crypto space. Decentralization presents both opportunities and risks, and without proper oversight, investors remain vulnerable to fraudulent schemes. Regulators, crypto analytics firms, and blockchain projects must work together to enhance transparency, detection capabilities, and regulatory enforcement to protect market participants from such manipulative practices.
HODL Team
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