Cryptocurrencies and Market Abuse Risks: It’s Time for Self-Regulation

This opinion article is written by Roy Keidar, Adv., Special Advisor to the Israeli law firm Yigal Arnon and co-Stephane Blemus, Legal Counsel at the Kalexius Law Firm, and PhD candidate in Blockchain Regulation at the University. Paris Sorbonne, France. Opinions expressed are those of the authors only and should not be attributed to NCC.

The end of 2017 was marked by high price volatility on the cryptocurrency markets, where even the price of dominant cryptocurrencies like Bitcoin, Ripple and Ether fluctuated strongly. Although the emphasis has been placed on the reasonableness of the value of crypto-currencies (some will say the lack of encryption) and the regulatory oversight of the cryptocurrency supply to the public, namely the process called Initial Coin Offering (OIC), the risks of market abuse have been much less discussed, if not properly handled.

Market manipulation is still a major problem for investors. The UK prudential regulator found in a 2016 report that possible insider trading could have occurred in 30% of UK takeovers in the previous four years and in about one fifth of acquisitions in 2015. From Moreover, in the modern era of financial markets, new types of cybernetic market manipulation, driven by artificial intelligence, digital technology and social media, are not exclusive to the cryptocurrency markets and could cause massive distortion. and instant information and prices in other markets. For example, the US Commodity Futures Trading Commission has concluded that the Flash Crash of May 6, 2010, which resulted in a trillion dollar stock market crash for just half an hour that day, was caused by the manipulation of the market.

Since its inception, Distributed Register Technology ("DLT") has been seen as a means to improve transaction transparency, mitigate systemic risk, and enhance financial stability. RegTech industry experts have even described blockchain as having the potential to create compliance partnerships between regulators and market players by directly introducing compliance rules into the blockchain. access, analysis and data processing almost in real time.

However, in reality, the risks of market abuse have not been eliminated by DLT and, given the nature of unregulated ICO or cryptocurrencies investments, these risks are, in many respects, much larger. Lack of information on price formation and order execution, handling of central order books or price manipulation such as pump and dump and spoofing are just some of the problems potential for cryptomobiles.

A quick review of current regulations shows that most countries have taken general legal steps to allow regulators to intervene in any market abuse, provided they can identify its existence. In the Member States of the European Union (EU), the key regulation on market manipulation and insider trading is Regulation No 596/2014 of 14 April 2014 (MAR) which replaced the 2003 European Directive and entered into force on 3 July 2016. In addition to several disclosure requirements, the MAR Regulation prohibits three types of market abuse of financial products, commodities and related derivatives in the EU:
Market manipulation or pricing of one or more financial instruments at an abnormal or artificial level;
An insider who deals with a third party, directly or indirectly, or (b) by recommending or advising a third party to engage in insider trading);
Unlawful disclosure of non-public information (ie, the abnormal disclosure of information to a third party by a person in possession of such information).

However, the application of the MAR Regulation to cryptocurrence is limited to the MiFID 2014/65 / EU ("MiFID"). In several Member States of the European Union (EU), the Czech Republic, the Czech Republic, the current state of the law, most existing cryptocurrencies do not meet the characteristics of a financial instrument. In the EU, only the German financial regulator has classified virtual currencies, including Bitcoins, as financial instruments, in accordance with Section 1 (11) of the German Banking Act (Kreditwesengesetz). This decision of the German government has been completed by the publication of the legal implications.

Similarly, Israel's securities law prohibits the use of various market manipulations, such as insider trading and unlawful disclosure of information. The Israel Securities Authority ("ISA") has investigated the investigation and enforcement to enforce such misconduct. The law applicable to the use of various titles, in most EU countries, including the clear interpretation of titles under Israeli law, including cryptocurrencies. Therefore, it can be argued that the market and the market are not regulated by securities law and that market manipulation is not prohibited.

Even though regulators take a broader view of existing legislation and apply existing prohibitions under the law to market manipulation, it is a significant obstacle to identifying such manipulations and their sources. A choice that stands out in cryptocurrencies is their anonymous nature. Cryptocurrencies, with (private) cryptographic keys as the only identification. Whereas blockchain technology has every transaction on the ledger distributed, establishing and proving the connection between some misconduct and the person behind it. One of the reasons why the illegality of certain actions, such as regulators and market players (eg stock exchanges).

In addition, there is no excuse when it comes to cryptocurrencies. Indeed, cryptocurrencies are generally not recorded in derivatives, instruments and financial instruments and are traded on different platforms spread all over the world. Many regulators can be considered as claimants and legal powers to enforce such misconduct, when in reality, the exchange platform is located in a foreign jurisdiction, and actual misconduct on the internet, using social platforms, such as Slack, Telegram, Twitter and Facebook.

Despite the obvious challenges of applying crypto-market-manipulation sanctions, there are early signs of change. Options, futures and swaps denominated in cryptocurrency may be considered derivatives and therefore as financial instruments. In Israel, the ISA published in December 2017 proposes draft amendments to the articles of the Israel Stock Exchange. This announcement was made in the past by an Israeli company, the direct result of the announcement by the company of its intention to get involved in encryption activities. The director of ISA has expressed his deep concern to Israeli investors in the stock market, where there is little or no correlation between the real economic value of the company and the price of its shares.

Yet most regulators tend to move slowly, especially in unexplored territory like the blockchain. On the other hand, trading platforms and investments can evolve more rapidly. Overall, as a