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Exchanges

KuCoin’s leaked ‘volume-boosting’ offers draw accusations of wash trading

Quick Take

  • The Block has found that KuCoin, a major Hong Kong exchange, asked projects at risk of being delisted to pay substantial volume-boosting fees
  • While it has been rumoured that crypto exchanges often fake volumes, multiple sources say KuCoin asked them to pay for the service 
  • KuCoin told The Block saying the communications may have come from fake or rogue employees

There appeared to be only one logical conclusion when 16 tokens were simultaneously delisted from KuCoin in late 2018: they were useless tokens, and the Hong Kong-based exchange was making an example of them for failing to generate trading volumes for its 5 million registered users.

But, as ever in crypto, the story goes deeper.

The Block has found that at least four projects received an ultimatum from KuCoin; pay up to $180,000 in volume-boosting fees, or face being delisted. 

After falling into the bottom 18 percent of tokens in daily trades, putting them on so-called “Special Treatment rules,” sources say that Jibrel, Encrpgen, Publica and Unikrn were advised there was one quick route to recovery: pumping volume by “any means necessary”.

“We received an email saying ‘you have the ability to improve your volume or you’ll be delisted,'” said Jibrel’s COO Talal Tabbaa. “Then they recommended market-making firms that would help us reach the minimum daily volumes they set for projects. I was honestly shocked at the requests they were making.”

Tabbaa said the exchange recommended two market-making options, including hftservicesltd.com, who introduced themselves as KuCoin affiliates who did the “listing and marketing” for the exchange.

KuCoin also allegedly reinforced that the market maker could help the project reach a minimum trading benchmark and remain listed on the exchange.

“It was basically to do wash trading. I’m 100% sure. Whenever there’s a [volume] guarantee, you know there’s something wrong,” Tabbaa said. When approached for comment, KuCoin confirmed that the author of the emails seen by The Block was a current employee.

Jibrel eventually turned down the $180,000 a year proposal, citing the desire to fuel “natural demand.” 

Encrypgen CEO, David Koepsell, tells a similar tale, saying they were encouraged to boost volume through what KuCoin called “an extensive marketing campaign.”

“They sent messages to us saying we were having issues with our volume and would we be interested in paying for market making,” Koepsell told The Block.

Indeed, in the email obtained by The Block, KuCoin pitched him on an “advanced marketing package” at a price of $90,000, payable in bitcoin. He refused to pay, and less than one year after being listed, KuCoin removed Encrypgen’s token. “We found that to be pretty disingenuous,” he said. “They buy a bunch and then sell a bunch at market just to get the volume.”

Another project which engaged in backroom delisting negotiations is Publica, a blockchain book-lending service. In its public Telegram channel, their CTO Yuri Pimenov confirmed that after being placed under Special Treatment rules, the project accepted KuCoin’s offer and “tried to test some artificial volume.” However, they soon ended the deal, as the fee had grown beyond what was originally agreed. Publica declined to comment when approached.

Finally, Rahul Sood, CEO of gaming betting company Unikrn, said publicly he also received KuCoin’s offer – or warning – about boosting volume. “What they come up with is a suite of fees…Essentially “fake your volume fees,” he told The Block. Unikrn continues to be listed on KuCoin despite refusing to pay. “We’re building a legit business here. We’re not trying to build a marketplace for our token.”

Market making, volume faking

Dave Weisberger, CEO of Coinroutes, told The Block that Kucoin’s alleged market making offers did not fit the model of traditional liquidity providers. 

“Providing volume [is bad]. It makes it look like there’s more interest than there is and to eventually be complicit in creating false impressions about how the coin trades,” he said. 

“An exchange by its definition is meant to be a neutral party. Taking the other side of trades makes a massive conflict of interest in that model. Any market making subsidiary would need to have information barriers, and [be] audited,” he said. It would be different, however, if they were connecting them with legitimate market markers or distinct, regulated parts of the firm.

A market maker in traditional finance is an intermediary who buys or sells regulated stock, receiving a spread for taking the short-term risk. But crypto analyst Sylvain Ribes explained that Chinese exchanges tend to call market-making what is actually wash trading, which is illegal for securities and commodities in the U.S., artificially inflating or depressing the price.

“It sounds like wash trading, trading against yourself to inflate volume figures…You can washtrade millions of dollars, it will do nothing to boost your liquidity,” Ribes told The Block, having found clear signs of mass hidden orders on KuCoin.

If there is no outside party from whom to buy or sell – and there is no real demand for the stock – it’s likely to be volume pumping, Weisberger notes.

“If you’re faking volume, you’re doing it for one of two reasons. You’re doing it to get listing fees, so the founders can get rich off of the poor sods buying the coin thinking there’s interest. Or because ….you bought the coin and you want the price to go higher. In both cases, you’re committing fraud,” Weisberger said.

He also noted that while marketing campaigns could be legitimate in some cases, if it misrepresented the role of the asset or involved a trading contest, “designed to pay traders to generate volume without any investment interest, then that would fall into the category of NOT legitimate.”

Management in the dark?

When approached for comment, KuCoin said it was “pretty sure” it had never offered market making services. Its representatives said that the emails suggesting otherwise may have come from fraudulent email addresses. 

Still, they conceded if the allegations were correct, it would be a problem. “If the emails are truly from KuCoin staff, we would definitely take actions to deal with behaviors that violate our company policy,” a representative said.

To be clear, the 16 projects delisted in the latest round didn’t necessarily all have volume issues or receive the alleged offers. BRD (formerly known as Bread wallet), for instance, said that they did not engage further in conversation after being warned they were being delisted, and hence did not see evidence of market making offers. However, BRD’s CRO said he “could see it happening.”         

A wider problem?

The delisting venture scheme may go beyond KuCoin, commentators say. Three projects also said fellow Hong Kong exchange OKEx offered them similar services but was “more discreet” about it, asking instead for “trading fees” – which they believe is a euphemism for volume faking.

“My instinct is they’re all doing it,” said Sylvain Ribes, in regards to exchanges making their own markets, noting that “a bit” of wash trading was “the least of crypto’s problems.”

“I’m very surprised by how many people still believe in so many ridiculous assets…They don’t care about wash trading…They’ll continue until they run out of money,” he added.

Meanwhile, Jibrel’s Tabbaa noted that exchanges had moved from extorting projects in the listing process to doing so before delisting them.

“This is probably one of the dirtiest fields I have seen to date,” he said.


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