Common Legal Risks and Legal Compliance Strategies for Cryptocurrency Market Makers

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 Market Makers in Cryptocurrency Circles

1. Definition and Functions of Market Makers

In traditional financial markets, market makers are mainly responsible for continuously placing orders, 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: Continuously placing buy and sell orders on the order book to ensure efficient matching of transactions.

• Price stability: Use algorithms and high-frequency trading strategies to smooth market fluctuations and reduce the risk of flash crashes.  

• Arbitrage operations: Use price differences across platforms or between different assets to capture profits.  

• Token management: Assist project parties 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

Market makers in the cryptocurrency circle can be divided into the following categories according to 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 (Agency Market Makers): provide liquidity services on behalf of project parties or exchanges, and make profits through fixed fees or commissions, with lower risks.  

• Algorithmic market makers (Algorithmic Market Makers): rely on quantitative strategies and high-frequency trading systems, and 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 currency circle not only face risks in traditional financial business, but also expose many risks in the legal environment unique to encrypted assets, which can be mainly divided into criminal risks, civil claims risks, administrative supervision risks and operational compliance risks.

1. Criminal legal risk: 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 unauthorized liquidity services to local users, it may constitute illegal operation and face criminal prosecution.

• Money laundering risk

When handling large amounts of funds, if market makers fail to strictly fulfill their customer identification (KYC) and suspicious transaction reporting (STR) obligations, 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 false orders (Spoofing) may touch 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 be identified as an "accomplice" and face charges of fraud. In serious cases, not only will the company be punished, but executives may also be imprisoned.

2. Risk of civil claims

• Securities fraud lawsuits

If market makers mislead investors through false statements or major omissions, they may face securities fraud claims and have to pay huge compensation or settlement costs.

• Risk of negligent statements

Providing false or untrue market quotes may mislead investors and lead to negligent statement claims.

• Contract breach risk

If the contract signed with the exchange or project party fails to be performed due to abnormal market fluctuations, it will trigger contract breach disputes and related claims.

3. Administrative supervision risks

• Market manipulation penalties

Regulators around the world are constantly strengthening their investigation and punishment of crypto market manipulation. 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. Failure to comply will result in severe penalties.

• Cross-border regulatory conflicts

The global nature of crypto assets means that different regulatory standards may apply to the same business in different countries. Market makers must deal with the compliance challenges brought about by cross-border regulatory conflicts.

4. Operational compliance risks

• Contract structure risks

Improper design of contract terms or lack of clear applicable laws and dispute resolution mechanisms can easily put market makers at a disadvantage in disputes.

• Technical compliance risks

If the 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

Large amounts of user data collected must comply with privacy protection regulations such as GDPR. If not managed properly, it is easy to suffer fines and reputation losses.

• Employee management risks

The flow of trading teams and technical talents may lead to the leakage of business secrets, and poor internal management may also lead to 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 such as business design, customer management, technical risk control and internal compliance construction.

1. Business model reconstruction: compliance design starts from the source

• Clear service objects and geographical boundaries

For different markets, especially in regions with stricter supervision such as mainland China, geographical 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 agent market-making model to reduce the risk of direct capital operation, and conduct business in accordance with local regulatory requirements.

• Strict project due diligence

For cooperative token projects, establish a legal nature assessment, team background investigation and economic model review mechanism to prevent joint liability caused by supporting high-risk projects.

2. Customer and fund management: Establish a compliance firewall

• Layered KYC and AML system

For different types of customers (institutions, individuals, high net worth customers), implement hierarchical identity verification and risk assessment to ensure that every transaction is traceable.

• Fund flow path planning

Funds should be conducted through regulated financial institutions or licensed service providers to avoid using personal accounts to handle large amounts of funds and ensure that the capital chain is legal and transparent.

3. Technical risk control and algorithm compliance: prevent hidden dangers in 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 a safe mode and suspends trading to reduce technical risks and sudden losses.

• Strengthen data security and privacy protection

Strictly comply with GDPR and other data protection regulations, encrypt and manage customer data, and prevent data leakage risks.

4. Internal compliance construction and regulatory dialogue: Build a compliance culture of continuous improvement

• Establish a full-process compliance system

Including regular risk assessments, employee compliance training, transaction monitoring, and a complete document 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 agencies in various countries, participate in industry associations and standard setting, and use industry collaboration to promote the regulatory environment to a more reasonable and transparent direction.

Mankiw Lawyer 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 tend to be unified, market makers will have a historical opportunity to transform from a "regulatory gray area" to a "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.