Fraud in the Digital Economy
Blockchain technology creates complete transparency in the trading of digital assets such as non-fungible tokens (NFTs) or coins. When a unique digital asset of that kind is sold, the transaction is recorded in a blockchain. Despite that, digital trading opens up a wide range of possibilities for fraud.
Prof. Dr. Claudio Tessone examines fraudulent practices such as wash trading and rug pulling. In wash trading, traders engage in bogus transactions by repeatedly buying and selling the same asset to each other at a progressively higher price, creating the illusion of demand for the asset. This can dupe outside investors into acquiring the asset for an overblown price. Tessone’s research has shown that wash trading is a widespread practice. “This is startling,” the blockchain researcher says, “because most perpetrators don’t even cover their tracks.” This means that a look at the blockchain would show potential buyers that the price was manipulated.
Another form of fraud is rug pulling. In this type of scam, investors are promised high returns if they invest in a crypto project. When enough money has been gathered, the project developers then abscond with all of the liquid funds, pulling the rug out from under the feet of the other investors and leaving them holding worthless shares (tokens) in the project.
Tessone finds it incomprehensible that many buyers and investors don’t do closer due diligence when they purchase digital securities. “They often are naïve and don’t understand that the transparency of the blockchain would enable them to see that they are getting conned.” Tessone is thus advocating for rules for the digital economy analogous to those governing the bricks-and-mortar economy. Switzerland already has such laws in place. “We need them worldwide,” Tessone says. At the same time, though, all of the laws on the books are useless if investors don’t prudently scrutinize who they are entrusting their money to.
Text: Thomas Gull (editor UZH Magazine) / originally published on UZH News