Chaos in the Cryptocurrency Market: Regulatory Implications of the CLS Global Manipulation Case and Predatory Conduct by Market Makers
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Chaos in the Cryptocurrency Market: Regulatory Implications of the CLS Global Manipulation Case and Predatory Conduct by Market Makers
The CLS Global case serves as a wake-up call for the crypto industry, making it imperative to learn from traditional finance.
Navigating Web3 tides with focused insightsBy Aiying
An encryption company has been fined $428,000 following an FBI raid that exposed a wash trading scheme. CLS Global FZC LLC, a UAE-based cryptocurrency market maker, claimed to support new project token trading by providing liquidity. Between August 23 and September 18, 2024, CLS Global was accused of manipulating the market for the "NexFundAI" crypto asset through wash trading—conducting self-dealings to fabricate nearly $600,000 in false trading volume, representing 98% of total volume during that period. The SEC determined that "NexFundAI" qualifies as a security, making this activity a violation of anti-fraud and market manipulation provisions under the Securities Act of 1933 and the Securities Exchange Act of 1934.
According to the SEC investigation, CLS Global used 30 wallets to conduct 740 wash trades driven by algorithms and bots designed to create the illusion of active trading and lure retail investors. Ironically, this manipulation was carried out at the request of "NexFundAI" promoters who hired CLS Global as a "market services" provider, allowing the firm to profit while both project creators and investors suffered losses.
I. Legal Action and Judgment
On October 9, 2024, the SEC filed a civil lawsuit against CLS Global and its employee Andrey Zhorzhes (Case No. 1:24-cv-12590-AK). Simultaneously, the U.S. Attorney’s Office for the District of Massachusetts initiated criminal charges against both individuals for market manipulation and wire fraud. This coordinated action was part of a broader Federal Bureau of Investigation (FBI) sting operation targeting misconduct in the crypto markets.
On April 7, 2025, the civil case reached a final judgment requiring CLS Global to:
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Pay penalties: $425,000 in civil fines, $3,000 in disgorgement of ill-gotten gains, and $80.39 in pre-judgment interest;
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Compliance obligations: Ensure all clients are non-U.S. persons or entities within 30 days, implement compliance policies within 45 days, and submit annual compliance reports for the next three years;
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Fine offset: Civil penalties may be reduced if criminal fines are paid in related proceedings.
The civil penalties for Andrey Zhorzhes remain undetermined, likely pending resolution of the criminal case, adding uncertainty to the overall outcome. The CLS Global case stands as one of the SEC’s landmark enforcement actions against market manipulation in the crypto space in recent years.
II. Market Maker Misconduct: From Loan Option Models to Wash Trading
CLS Global’s wash trading represents only the tip of the iceberg regarding predatory practices among cryptocurrency market makers. As previously analyzed in Aiying's article on the “Loan Option Model,” similar exploitative tactics take advantage of market opacity and inexperienced project teams.
Predatory Operations via the Loan Option Model
In the crypto market, market makers use the "loan option model" to provide liquidity for new projects. Project teams lend tokens to market makers, who trade them on exchanges to stabilize prices. Contracts often include option clauses allowing market makers to return or purchase the tokens at a predetermined price in the future. However, some unscrupulous market makers abuse this arrangement:
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Dumping for profit: Selling large amounts of borrowed tokens to drive down prices, triggering panic selling among retail holders, then buying back low to repay the loan and pocketing the spread;
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Option exploitation: Using contractual options to return tokens at their lowest market value, maximizing personal gains;
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Information asymmetry: Project teams, unaware of contract risks, sign opaque agreements and become easy prey for market makers.
These actions can be devastating for small projects: token prices collapse, community trust erodes, exchanges may delist due to low trading volume, and fundraising and survival prospects become bleak.
CLS Global’s Wash Trading Scheme
CLS Global’s wash trading shares key similarities with predatory loan option models—both exploit the role of market makers to create artificial market conditions:
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Fabricated trading volume: By conducting self-trades, CLS Global created the appearance of strong activity around "NexFundAI," enticing retail participation;
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Erosion of trust: Once the artificial boom collapsed, investors incurred losses and the project's reputation was damaged;
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Regulatory gaps: Wash trading exploits the lack of real-time monitoring and transparency in crypto markets, much like how opaque contracts enable abuse in loan option models.
Additionally, other common market maker tactics mentioned—such as "hidden blade" contracts, liquidity "hostage-taking," and misleading "full package" service bundles—are also widespread in the industry. Collectively, these practices lead to market cap erosion, community disbandment, and severe damage to sector-wide credibility.
III. Lessons from Traditional Finance: A Textbook for Crypto Markets
Traditional financial markets have faced similar challenges with market manipulation but have significantly curbed predatory behavior through mature regulation and transparent mechanisms. The CLS Global case serves as a wake-up call for the crypto industry, highlighting the urgent need to learn from traditional finance.
How Traditional Finance Responds
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Strict regulation: The U.S. SEC’s Rule SHO restricts naked short selling by requiring locates before short sales; the "uptick rule" prevents malicious price suppression. SEC Rule 10b-5 strictly prohibits market manipulation, while the EU’s Market Abuse Regulation (MAR) provides comparable safeguards.
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Transparency: Agreements between listed companies and market makers must be disclosed to regulators; trading data is publicly accessible; large transactions require reporting, reducing opportunities for hidden manipulation.
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Real-time monitoring: Exchanges use algorithmic surveillance to detect abnormal price movements and trigger investigations; circuit breakers pause trading during extreme volatility to prevent panic.
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Industry standards: The Financial Industry Regulatory Authority (FINRA) sets ethical guidelines for market makers; NYSE-designated market makers (DMMs) must meet stringent requirements.
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Investor protection: Class-action lawsuits and the Securities Investor Protection Corporation (SIPC) offer avenues for accountability and compensation.
These measures form a multi-layered defense system that effectively constrains market maker misconduct in traditional finance. For example, during the 2008 financial crisis, the SEC swiftly investigated malicious short-selling of bank stocks, resulting in fines and improved regulatory frameworks.
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