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Coinbase-Backed Reserve Points at Wash Trading and Artificial Inflation in Stablecoin Market

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by Bhushan Akolkar · 3 min read
Coinbase-Backed Reserve Points at Wash Trading and Artificial Inflation in Stablecoin Market
Photo: Reserve

Reserve CEO, Nevin Freeman says that stablecoin projects indulge into dubious activities trapping investors funds to artificially inflate demand and thus the market cap of the stablecoins.

The concept of stablecoins has been a hit among crypto market investors, especially the conservative ones. Basically, stablecoins are cryptocurrencies, with their value tied to any fiat currency or commodity. Stablecoins eliminate the need for fiat-to-crypto conversion or vice versa every time while trading in the market. Moreover, they also provide investors a volatility-proof exposure to decentralized assets.

However, insiders claim that stablecoins are turning vulnerable with some manipulative practices in the ecosystem. Nevin Freeman, CEO of Reserve, a Coinbase-backed stablecoins accuses rivals of playing it foul. Freeman says that rival stablecoins artificially inflate their trading volumes and market cap while creating misleading data on websites like The Stablecoin Index and CoinMarketCap. 

Dubious Tactics By Stablecoin Operators

Freeman also points to two major “tricks” and dubious tactics used by stablecoin operators to cheat investors. The first is offering discounts to investors willing to lock-up their funds a particular time period. The second is encouraging traders to put the buy and sell at the same time thereby generating more volumes and liquidity. This ultimately means encouraging traders for “wash-trading” activities.

The two recent examples of such stablecoins include the Gemini Dollar (GUSD) and the Paxos Standard Token (PAX). Both these tokens offered 1% discount to selected OTC trading desks to boost up adoption. As said by Freeman, the discounts were for those investors willing to “lock-up” their funds for a specified time period.

Reserve claims that these stablecoin operators floated these scheme on OTC trading desks of exchanges like Binance and Huobi. It also helped the GUSD’s market cap to climb from $87 million to $103 million the very next day on CoinMarketCap. Similarly, Paxos Standard managed to double its market cap from $40 million to $80 million in October 2018, reports CCN.

Tether Continues to Remain In Controversy

The controversial stablecoin Tether (USDT) is yet again in the limelight for the wrong reasons. Freeman points at Tether’s involvement in wash-trading activities. Last year, Bloomberg also reported the use of Tether’s USDT stablecoins for wash-trading on the Kraken crypto exchange.

Tether has reportedly lost over 30% of its market share in the stablecoin market last year. Tether still contributes two-thirds of the $3 billion stablecoin industry.

To ensure safe market participation, Freeman asks savvier market investors to look into other metrics like the organic discussion about a project, the number of wallet addresses associated with a token, and the number of consumer app downloads.

However, Freeman continues to believe that stablecoins are best positioned for long-term market success. His company Reserve also sees huge growth potential in countries facing huge economic challenges like Angola and Venezuela. He says that stablecoins can help citizens of the financially distressed countries to insulate their wealth.

Freeman also points at the use of stablecoins to facilitate an efficient and cheaper model for remittance payments. He says, “Solving real-world problems, not financial engineering through arbitrage coins, is what is going to bring institutional legitimacy to the stablecoin market.”

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