Market manipulation is one of the primary concerns of the US Securities and Exchange Commission when it turned down a number of Bitcoin Exchange Traded Fund (ETF) applications. Tech company Solidus Labs believes it has developed a technical monitoring solution to address this issue.
Solidus announced on Wednesday that it will launch a market surveillance tool to monitor crypto exchange transaction data and identify potential tampering on various platforms in an effort to address ongoing regulatory concerns surrounding crypto markets.
"These are issues that have been largely resolved in traditional markets by market surveillance systems designed for traditional markets," said Chen Arad, chief operating officer of Solidus Labs.
Proponents say an ETF would make Bitcoin available to a wider range of retail investors by offering a regulated product that would be available on major investment platforms like Charles Schwab or TD Ameritrade.
However, a number of ETF applications have been denied by the SEC because the Bitcoin market is not large enough to conduct proper surveillance. Chairman Jay Clayton, who will be leaving the role at the end of the year, said in the past that a Bitcoin ETF cannot be approved until the agency is confident that the market is free from tampering. An example of manipulation is the laundry trade, where some accounts trade back and forth to make the volume seem higher than when using bots.
In 2019, the agency rejected Bitwise's efforts, stating that there had to be an agreement to share surveillance between an exchange and a market of "significant" size in order to find a potential example of how to fix this issue.
How it works
Solidus' tool consists of four parts: data collection, data storage, data processing and reporting, Arad said.
The program collects data from a number of parties who conduct transactions, mainly exchanges, and act as a kind of broker for the information. This ensures that exchanges are not required to share potentially proprietary trading data with one another, Arad said.
"The first part is to collect the data completely anonymized, obfuscated and encrypted and put it together in a multi-tenant database," he said.
The Solidus system then processes the information and compares buy and sell data to look for potential laundry dealers or other forms of market manipulation.
Part of this processing includes comparing market information from accounts on an exchange with their "neighbors," that is, accounts with similar attributes, said Asaf Meir, CEO of Solidus.
Neighbors are effectively a way to create different types of broad profiles, which in turn serve as some sort of average basis for comparing account activity when a user's behavior is out of the norm.
Solidus examines the reporting requirements of an exchange, what alerts should be reported and which parties might be involved before sending those alerts to their customers.
“This type of data is extremely sensitive and confidential. By the way, our product generally works properly too. Our product is based on private data provided to us by exchanges, broker traders and regulators, ”said Meir.
In a broader sense, the same technology can be used in different jurisdictions and potentially act as some sort of global standard to aid global exchanges in compliance with the Financial Action Task Force's travel rule, Arad said.
Solidus is in talks with a number of crypto exchanges and regulators to start operating its surveillance tool in the United States. However, Arad and Meir declined to identify potential customers on the file and led ongoing discussions.
Chris Land, general counsel for the Wyoming Division of Banking, said his agency is one of the regulators working with Solidus and evaluating their solution.
The company has already contributed to a section on market manipulation in an upcoming handbook the division plans to publish, he said.
The tool is already in use by several other customers outside of the U.S., Arad said, adding that it was specifically designed to address regulatory concerns.
“We worked with certain exchanges in a specific jurisdiction where they had to apply for a license. In this process we also started to work with the controller and we developed the product with controllers in general, ”he said.