The SEC has sights now on NFT traders that distort the market with manipulative trades.
Wash trading is a very odd term even in the crypto market. What does it mean exactly? Wash-trading, also known as “round-tripping” is a manipulative approach to trading in financial situations. The purpose of this technique is to push false information into the market. The manipulation technique influences an assets trading activities and price in a favorable way for the manipulating party. This action then successfully misrepresents the true value of the asset on the market. Investors may purchase the asset for the fake price and then be unable to resell it for a fair price or any tangible value at all.
Simply put, a wash trade creates a false value in the hopes to sell the asset for much more than it is worth and in some cases make the asset unavailable for reselling.
One major instance of this took place during October of 2021 in which a CryptoPunk was sold at an erroneous price. The CryptoPunk 9998 was sold for 124,457 Ether or about $532 million at the time. The significant point of this sell was the fact that the ETH used for purchase was transferred to the seller but also returned to the buyer to repay for what was used to initially purchase it. This is basically money laundering using an NFT.
Though wash trades are unscrupulous and devious in nature due to the nature of NFTs in general it is a bit difficult to concretely call the practice illegal. That may soon change.
Though it has been shown that wash trades are still not very valuable, there are still those that do it. This is a big issue for regulations in the crypto industry.
Some may state this is a “victimless” crime as there is no proof that there is money exchanged but rewarding fake high-volume traders is definitely a problem. This in turn drives out “good money” as investors and traders that want to do legitimate trades are driven out.
Wash trading has been barred in the United States since the Commodity Exchange Act in 1936. Since the passing of the act the SEC and CFTC have carefully watched the markets and enforced actions upon those that participate in the act. The SEC considers wash trading as an abusive practice that misleads the market. The IRS also refuses to allow taxpayers to deduct losses from wash sales.
Currently the SEC is preparing methods for enforcing laws against those that participate in wash sales in the new crypto market. The hope is that the government branch is working on ways to enforce trade in the NFT market. As some of the traders are anonymous those traders are possibly in the sights of the SEC first. The thought process is that NFTs will be considered as securities and monitored.