Outsmarting Bots: Game Theory or Market Manipulation?
In a recent Twitter/X post, a trader claimed that while on the NFT marketplace Blur, he noticed that a crypto trading bot was copying his NFT bids on the platform. For context, on Blur’s NFT marketplace, if a user intends to purchase an NFT that’s already owned by someone else, they can place a bid. The NFT, as well as other perks like ‘bid points’ and Blur’s native token, would then be rewarded to users who make the “riskiest” bids.
In the above case, the trader Tweeted that he caught the bot shadowing his Blur NFT bids. The trader then made 12 Azuki NFTs available for bid on Blur. According to media reports, the trader next allegedly used another account to place bids of 50 ETH, or $91,470, on each the 12 Azuki NFTs. In other words, the bidder placed bids on those same NFT assets he already owned to allegedly lure the bot into copying his moves. The bot took the bait and made 50 ETH bids on each of the 12 Azuki NFTs. In the end, the trader accepted the bot’s bids and made a gain of 800 ETH, or US$1.5 million.
The trader’s Twitter/X post about the above bot trade went viral over the weekend and caught the attention of the crypto community. The incident was celebrated by some and criticized by others and presents a fascinating case study on the legal and ethical challenges inherent in NFT bot trades. Reactions in the crypto community were polarized. Many lauded the trader’s ingenuity, while others were critical of the trade.
Many questioned whether the trader engaged in 'bid spoofing' or 'shill bidding'. In conventional markets, bid spoofing is form of 'market manipulation that entails placing orders with no genuine intention of seeing them fulfilled. Bid spoofs can create a misleading appearance of high or low demand for an asset. While this is recognized as illicit behavior in traditional markets, the lines in the crypto and NFT domain are more ambiguous. Others have opined whether this sort of bot gaming might potentially amounts to wire fraud.
Spoofing in trading refers to placing fake bids or offers with the intention of canceling them before they are executed. It's the act of placing orders that aren't genuinely meant to be fulfilled. According to 7 U.S.C. § 13(a)(2), intentionally violating this anti-spoofing rule is a serious crime that can result in a 10-year prison sentence and a fine of either $1 million or triple the profit made, whichever is larger. This law has a limitation period of five years.
As an alternative to the anti-spoofing rule, prosecutors may make the tactical decision to charge alleged bid spoofing conduct under the wire fraud statute. Wire fraud statute does come with a trade-off. To secure a conviction, prosecutors must prove there was a "materially false or fraudulent pretense, representation, or promise". This element is not required under the anti-spoofing statute. This proof can pose a challenge, as it necessitates showing not only that the accused engaged in deceptive trading but also that they made a materially false representation in doing so.
In closing this recent incident reveals the challenges and complexities confronted in an evolving digital asset economy and underscores the need for clearer regulations and guidelines.
Nothing in this post should be considered legal advice or the creation of an attorney-client relationship. This blog is strictly for informational purposes only.