Authors: Shao Jiayi, Liu Honglin
Recently, global regulators have been stepping up their efforts to rectify cryptocurrency market makers. In February 2025, Aleksei Andryunin, the founder of Portugal-based cryptocurrency market maker Gotbit, was extradited to the United States and faced a number of serious charges, including wash trading and market manipulation. This case not only aroused widespread market concern about the compliance risks of market makers, but also warned the industry that it must face up to how to strike a balance between legal compliance and efficient operations in the context of stricter global regulation. Next, this article will comprehensively analyze the various legal risks faced by cryptocurrency market makers from a global regulatory perspective, and propose a set of practical compliance survival strategies.
Overview of Cryptocurrency Market Makers
1. Definition and Functions of Market Makers
In traditional financial markets, market makers are mainly responsible for placing orders continuously, providing liquidity, narrowing the bid-ask spread, and ensuring the smooth operation of the market. In the field of cryptocurrency, market makers are not only liquidity providers, but also shoulder the important tasks of price discovery and market stability. Their core functions include:
Liquidity guarantee: Buy and sell orders are continuously posted on the order book to ensure efficient transaction matching.
Price stability: Use algorithms and high-frequency trading strategies to smooth market fluctuations and reduce the risk of flash crashes.
Arbitrage: Capturing profits by taking advantage of price differences across platforms or between different assets.
Token management: Assist project owners in managing token liquidity to avoid sharp price fluctuations caused by scarcity of transactions in the early stages of listing.
2. Main types of market makers
Cryptocurrency market makers can be divided into the following categories based on their operation methods and business models:
Traditional market makers (Principal Market Makers): use their own funds to provide liquidity, bear market risks, and earn the difference between buying and selling.
Agency Market Makers: Provide liquidity services on behalf of project owners or exchanges, earn profits through fixed fees or commissions, and have lower risks.
Algorithmic Market Makers: Relying on quantitative strategies and high-frequency trading systems, they continuously adjust quotes through automated programs.
Self-operated market making by the project party: Some project teams set their own market-making strategies and directly intervene in market performance, but they are easily suspected of manipulating the market.
Multi-dimensional legal risk analysis
Market makers in the cryptocurrency industry not only face risks in traditional financial businesses, but are also exposed to many risks in the unique legal environment of crypto assets, which can be mainly divided into criminal risks, civil claims risks, administrative supervision risks and operational compliance risks.
1. Criminal legal risks: a sword hanging over your head
Risk of illegal operation
Since some jurisdictions (such as mainland China, India, and Russia) have not yet legalized cryptocurrency trading activities, if market makers provide unlicensed liquidity services to local users, they may constitute illegal operations and face criminal prosecution.
Money laundering risks
If market makers fail to strictly fulfill their customer identification (KYC) and suspicious transaction reporting (STR) obligations when handling large amounts of funds, they may be regarded as facilitating money laundering and bear criminal liability.
Market manipulation risk
Using algorithms to create false liquidity, conduct arbitrage transactions, or spoof orders may reach the criminal line of market manipulation and may be severely cracked down in the United States and other countries.
Fraud Risk
Providing liquidity support for token projects suspected of fraud may result in being identified as an "accomplice" and facing charges of fraud. In serious cases, not only will the company be punished, but executives may also be imprisoned.
2. Civil claims risk
Securities Fraud Litigation
If market makers mislead investors through false statements or material omissions, they may face securities fraud claims and be required to pay large damages or settlement costs.
Risk of negligent representation
Providing false or misleading market quotations may constitute misleading to investors and lead to claims for negligent representation.
Contract breach risk
If the contract signed with the exchange or project party fails to be fulfilled due to abnormal market fluctuations, it will lead to contract breach disputes and related claims.
3. Administrative supervision risks
Market manipulation penalties
Regulators around the world are stepping up their crackdown on cryptocurrency market manipulation, and market makers are prone to fines, business restrictions, or even license revocations due to improper trading strategies.
Anti-money laundering sanctions
Increasingly stringent anti-money laundering regulations in various countries require virtual asset service providers (VASPs) to strictly record and report transaction information, and failure to comply will result in severe penalties.
Cross-border regulatory conflicts
The global nature of crypto assets means that the same business may be subject to different regulatory standards in different countries, and market makers must deal with compliance challenges brought about by cross-border regulatory conflicts.
4. Operational compliance risks
Contract structure risks
Improperly designed contract terms or the lack of clear applicable laws and dispute resolution mechanisms can easily put market makers at a disadvantage in disputes.
Technical compliance risks
If an automated trading system does not have a circuit breaker mechanism or the algorithm is not strictly reviewed, it may exacerbate volatility under extreme market conditions and even trigger regulatory red lines.
Data privacy risks
The large-scale collection of user data must comply with privacy protection regulations such as GDPR. If it is not managed properly, it may result in fines and reputation loss.
Employee Management Risk
The turnover of transaction teams and technical talents may lead to the leakage of business secrets, and poor internal management may also trigger legal joint liability.
Compliance survival strategy: Building global best practices
Faced with a severe legal and regulatory environment, cryptocurrency market makers must build a comprehensive risk prevention and control system from multiple dimensions including business design, customer management, technical risk control, and internal compliance construction.
1. Business model reconstruction: compliance design starts from the source
Clarify service objects and geographical boundaries
For different markets, especially regions with stricter regulations such as mainland China, geographic blocking measures should be taken to avoid serving illegal users through IP screening, document verification and other means.
Optimize business model selection
Gradually transform from the principal market-making model to the agency market-making model to reduce the risk of direct capital operations, while conducting business in compliance with local regulatory requirements.
Strict project due diligence
For cooperative token projects, a legal nature assessment, team background investigation and economic model review mechanism will be established to prevent joint liability caused by supporting high-risk projects.
2. Customer and fund management: Establish a compliance firewall
Layered KYC and AML system
We implement tiered identity verification and risk assessment for different types of customers (institutions, individuals, and high-net-worth customers) to ensure that every transaction is traceable.
Funds flow path planning
Funds should be transferred through regulated financial institutions or licensed service providers to avoid using personal accounts to handle large sums of money and ensure that the funding chain is legal and transparent.
3. Technical risk control and algorithm compliance: preventing hidden dangers at the initial stage
Regular algorithm review and code audit
Establish an internal or third-party audit mechanism to ensure that the strategies in the automatic trading system do not involve illegal activities such as false quotes and back-to-back transactions.
Establish a circuit breaker mechanism
When the market fluctuates abnormally or there is a technical failure, the system automatically enters safety mode and suspends trading to reduce technical risks and sudden losses.
Strengthening data security and privacy protection
Strictly comply with GDPR and other data protection regulations, encrypt customer data and manage permissions to prevent data leakage risks.
4. Internal compliance construction and regulatory dialogue: Building a compliance culture of continuous improvement
Establishing a full-process compliance system
This includes regular risk assessments, employee compliance training, transaction monitoring, and a complete documentation management system to ensure that compliance efforts can be demonstrated in the face of regulatory investigations.
Proactive regulatory communication and industry collaboration
Actively maintain dialogue with regulatory authorities in various countries, participate in industry associations and standard setting, and use industry collaboration to promote the regulatory environment towards a more reasonable and transparent direction.
Attorney Mankiw's Summary
Against the backdrop of tightening global regulation and increasingly fierce market competition, cryptocurrency market makers are facing unprecedented legal risks and compliance challenges. Building a full-process risk management system covering criminal, civil, administrative and operational aspects has become a necessary prerequisite for market makers to survive and develop in the market.
As the global cryptocurrency market continues to mature and regulatory standards in various countries become more unified, market makers will have a historic opportunity to transform from the "regulatory gray area" to the "compliant blue ocean". Only companies that embed compliance into their business models and continuously improve their internal control systems can remain invincible in the ever-changing market and provide investors with a safer, more transparent and efficient trading environment. The era of huge profits for market makers in the cryptocurrency circle has ended. Only by internalizing compliance as a gene can they survive steadily in the regulatory wave. From business architecture to technical risk control, from customer management to global vision, every step must be based on the law and risk as a mirror. Compliance is not a cost, but the only ticket to sustainable development.
