Original author: Gao Mengyang - Senior lawyer at Shanghai Mankiw Law Firm

01. What is a market maker in the cryptocurrency circle?

Market Maker, a term that sounds high-sounding, is often associated with terms in the financial field such as stocks and futures, which makes countless novices sigh at the professionalism and high threshold. Market makers appear in the cryptocurrency circle, and the superposition of the quantum state between the two makes it even more confusing.

In fact, market makers are not something mysterious. They were invented by the Dutch and designed to solve the liquidity problem in the market. Simply put, you want to buy a certain stock (it can be futures or some cryptocurrency) at a price of 100 in the market, but there is no seller at this price or at this time. If there is no suitable seller, the transaction will not happen, and the market will inevitably lack liquidity. We know that a market lacking liquidity has no market, and funds and resources cannot be reasonably allocated, and it often declines in the end. At this time, a middleman appears and is willing to sell you a stock (futures or cryptocurrency) at a price of 100, and his hand comes from the fact that he once bought it from the previous house at a price of 90. In this way, you buy the stock, he makes money, the exchange gets the fee, and everyone has a bright future.

Therefore, market makers are a mechanism that a mature market should have, increasing market liquidity and acting as a lubricant. The cryptocurrency world is no exception.

Nowadays, there are many exchanges in the cryptocurrency circle, and there are also some market makers, which allow people to buy (quan) in (bei) and sell (shou) out (ge) in the field of cryptocurrency. Its principle is no different from that of market makers in the securities market, but the criminal risks faced by market makers in the cryptocurrency circle are much higher.

02. What are the risks for market makers?

my country's securities market has strict access policies for market makers. For example, if you want to be a market maker on the Science and Technology Innovation Board, you must meet two high-threshold hard conditions: net capital of no less than 10 billion yuan for the past 12 months and a classification rating of Class A or above (inclusive) in the past three years. You also need to apply to the China Securities Regulatory Commission and only after its approval can you "hold a certificate to work."

Of course, this is the A-share Science and Technology Innovation Board, which is a formal and legal "casino" where beauty and wisdom coexist. Our cryptocurrency sector, which is not loved by its parents, cannot be compared. Those major overseas market makers, such as Jump, Wintermute, Amber Group, B2C 2, DRW Trading, etc., are not without problems (some of them have also been criticized for large fluctuations in individual projects). The main reason is that they are not regulated by China's criminal law, so there is no need to discuss them for the time being. Let's mainly talk about the market makers of these domestic exchanges.

First of all, it should be pointed out that the current domestic secondary market for digital collections is mostly based on consignment, resale and other models, and does not involve market makers for the time being (but it may also be manipulated). We are mainly talking about those exchanges that have gone underground and hidden in mysterious corners.

As we all know, after the September 4th announcement, exchanges were hit and collapsed one after another, and went overseas to survive, and a small number of them went underground. These exchanges that moved thousands of miles away often faced a situation of insufficient liquidity due to lack of traffic, so they needed market makers to revitalize the market, but this often became their "evidence of guilt."

The direct reason is that the 94th Announcement had explicitly prohibited it, requiring that "any so-called token financing trading platform shall not engage in the exchange business between legal currency and tokens, "virtual currency", shall not buy or sell tokens or "virtual currency" or act as a central counterparty to buy or sell tokens or "virtual currency", and shall not provide pricing, information intermediary and other services for tokens or "virtual currency". "

In this case, if the market maker is introduced from outside, it would be fine. Otherwise, this kind of behavior of being both a referee and a player can easily be identified as "market manipulation". I am not saying that it constitutes the crime of "market manipulation". Of course, this crime is not accurate. The correct name is "crime of manipulating the securities and futures markets". The punishment is for those who use illegal means to "cut leeks" in the regular and legal securities and futures markets. In the gray area of ​​our currency circle, this crime is not needed yet, but if you buy and sell by yourself, release false information, and pull up the market to sell, it may constitute the crime of fraud. Of course, specific problems must be analyzed specifically. I did not say that it will constitute the crime of fraud, but be careful of investors' persistence (reporting) after they become angry and embarrassed.

In addition to fraud, another possible charge is the panacea of ​​economic crime - illegal business operation. Putting aside some controversial characterizations in practice (as a defense lawyer in a new field, I disagree with the abuse of this charge), the investigative authorities like to use this charge to catch everything, so from a compliance perspective, this charge is like a sword of Damocles hanging over your forehead, which may pierce you with "original sin" from time to time.

Of course, in reality there are some gambling parties who use the name of market makers and directly engage in gambling. There is no doubt that they are suspected of committing the crime of opening a casino, which I will not elaborate on here.

03. Conclusion

Market makers are often associated with "dealers" and have become the nightmare of countless investors. In the cryptocurrency industry, where regulation is strong/neutral, market makers do seem to be more "effective". However, if it goes too far, some players will not only lose the cards but also turn the table. Earning the money you deserve is always the right path.

Special statement:

This article is an original article from Shanghai Mankiw Law Firm and represents only the personal views of the author and does not constitute legal advice or legal opinion on specific matters.