Two Former Executives Jailed for Faking Cryptocurrency Transaction Volumes

On January 17, 2019, two former executives from Komid, a South Korean cryptocurrency exchange, were jailed for three and two years respectively for using fake accounts to fraudulently inflate transactions on the exchange.

The Sentencing

In a historic move, the 13th Criminal Settlement Agreement of the South District Court in Seoul has dished out the first ever jail term for the manipulation of a cryptocurrency exchange’s transaction numbers. The sentence in question was given to two executives at Komid, a Korean cryptocurrency exchange.

The two executives who have been sentenced are Hyunsuk Choi and another individual named Park. Hyunsuk Choi served as the CEO and an in-house director at Komid respectively.

Choi received a three-year sentence while Park received a two-year sentence for what the judge called “orchestrating fraudulent trading volume”.

The pair allegedly set up five accounts, fabricating 5 million transactions which amounted to around $45 million in fees. A bot was used to create large orders which inflated the exchange’s transaction volume when in fact the exchange never had that much in funds to begin with.

The Problem of Wash Trading

The act that the men engaged in is referred to as ‘wash trading’ and is the process by which transactions are faked in order to deceive investors and the public in order to make higher profits.

It has been speculated that the practice of ways trading is more common among small altcoins trying to attract more business. In the case of Komid, the money being made from the scheme is hardly a small amount.

In recent times, a number of exchanges such as Bitforex and Binance have been accused of faking a percentage of their transaction volumes, though the exchanges have adamantly denied these allegations.

The reason behind these suspicions is that similar amounts of transactions of the same tokens seem to take place around the same time on these exchanges, leading some to believe that automated bots are carrying out these transactions to drive up figures.

A study by the Blockchain Transparency Institute even suggests that up to 80% of pairs on 95% of exchanges are faked.

The Effect of Wash Trading on the Industry

When reviewing the case, the judge who gave the sentencing commented on the effect of wash trading on the crypto industry, saying, “the crime has damaged customers’ confidence in the virtual currency exchange and has had a negative effect on the domestic virtual currency trading market.”

This statement has truth to it as cryptocurrency is just starting to gain the interest and trust of the public, and being associated with transaction manipulation is hardly a good look.

This sentencing, however, could set a precedent as well as send a strong message that wash trading will not be tolerated by law enforcement.