The role of market makers (MMs) in the cryptocurrency ecosystem is evolving rapidly, especially under the watchful eye of global regulators. High-profile enforcement actions, such as those against Gotbit, have thrust MMs into the spotlight. For founders who often lack in-house legal support and operate in legal grey areas, understanding how regulations apply — both now and in the future — is crucial. This guide explains the fundamentals of legal regulations of market making, explores the unique challenges posed by decentralized automated market makers (AMMs), and outlines practical steps to mitigate legal risks and preserve market integrity.

What Do Market Makers Do?

Market makers continuously quote buy and sell prices for various financial assets, from traditional stocks and bonds to established cryptocurrencies and newly listed tokens. By ensuring there is always at least one party willing to trade, MMs provide liquidity, making it easier for investors to enter or exit positions. In traditional finance (TradFi), market makers typically profit from the spread between their quoted bid and ask. In crypto markets, this model persists but is complicated by the volatility, fragmentation, and nascent regulatory standards of digital assets. Well-known names in TradFi include Citadel Securities, Jane Street, and Goldman Sachs.

These entities have diverse trading strategies, ranging from high-frequency trading on centralized exchanges to advanced algorithms operating across multiple decentralized liquidity pools. Their sophistication and scale vary widely, as do their licensing and compliance obligations.

How Traditional Finance Market Makers Are Regulated?

TradFi regulators aim to ensure that all participants — be they institutional investors, retail traders, or MMs — operate in fair and orderly markets. MMs must adhere to principles designed to prevent market manipulation, protect investors, and maintain a level playing field. Each country has its own set of regulations applicable to MMs, which we briefly discuss below.

United States

In the United States, MMs are subject to a combination of federal legislation and regulatory rules enforced by the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the Commodity Futures Trading Commission (CFTC).

Market makers must also comply with additional requirements based on the asset class they trade and the specific stock exchange where they operate. For example, firms intending to market-make on NASDAQ must apply for membership and adhere to the NASDAQ Rulebook.

The primary legislation governing market makers in the U.S. securities market is Regulation NMS (National Market System), which aims to ensure fair and transparent trading by establishing the following key obligations:

Dissemination of Quotations

• Prompt Communication of Bids, Offers, and Quotation Sizes: Exchange market makers must promptly report their best bids, offers, and quotation sizes for any security to their national securities exchange.
• Obligation to Execute Orders at Published Prices: Market makers are required to execute buy or sell orders at prices as favorable as their published bid or offer, up to their quoted size. This rule applies to trades with brokers, dealers, or other customary counterparties.

Display of Customer Limit Orders

• Publication of Customer Limit Orders: Market makers must immediately publish customer limit orders that improve their own bid or offer. They are also required to display orders priced at the national best bid or offer if the order would significantly change the size of the quoted market.

Order Protection Rule

• Prevention of Trade-Throughs: Market makers must establish and enforce policies to prevent executing trades at prices inferior to protected quotations available at other venues.
• Minimum Pricing Increments: Market makers cannot display, rank, or accept bids or offers priced below the minimum increments specified by Regulation NMS.

Consolidated Audit Trail

• Data Recording and Reporting: Market makers are required to participate in the Consolidated Audit Trail or Rule 613 adopted by the SEC by recording and submitting detailed information on orders and transactions. This includes order receipt, routing, modifications, cancellations, and executions, ensuring market transparency and regulatory oversight.

While these regulations are specific to the U.S., similar frameworks focusing on market integrity, transparency, and fairness are prevalent in other major jurisdictions.

European Union

In the European Union, market makers operate under a dual framework of EU-wide regulations and national rules, overseen by local supervisory authorities. Like their U.S. counterparts, market makers face additional requirements depending on the asset class and the regulated exchange they trade on.

The key legislation governing EU market makers includes the Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR). Unlike the principles-based Regulation NMS in the U.S., MiFID II and MiFIR adopt a more detailed and prescriptive approach. Notable distinctions include:

Publishing Bid and Offer Prices

• Similar to Regulation NMS, MiFID II and MiFIR emphasize transparency by requiring pre- and post-trade disclosures for financial instruments. This includes publishing detailed bid and offer prices, the depth of trading interest, and executed transaction data.

Algorithmic Trading and Direct Electronic Access

• MiFID II directly addresses algorithmic trading risks by requiring firms, including market makers, to implement systems and controls to prevent disorderly market conditions. This regulation extends to firms offering direct electronic access to trading venues.

Market Making Agreements

• MiFID II mandates that regulated markets establish written agreements with market-making firms. These agreements must define minimum obligations for liquidity provision, including requirements for presence, trade size, and spreads.

Crypto Market Makers

The crypto industry has introduced new dynamics that challenge traditional regulatory frameworks. There are traditional finance market makers, such as DRW Trading and Flow Traders, broadening their asset classes and including cryptocurrencies. There are also crypto native market makers, such as Wintermute, B2C2, Jump Crypto, and Cumberland.

These centralized market makers oftentimes use algorithmic trading to market make on exchanges, which involves the use of computer algorithms to automatically execute trades based on predefined rules. These rules can include conditions such as price, volume, or time.

The rise of decentralized finance (DeFi) has given birth to a new form of exchanges, namely decentralized exchanges (DEX) — a peer-to-peer marketplace based on a set or smart contracts where transactions occur directly between crypto traders without a centralized intermediary.

An automated market maker (AMM) is a type of DEX protocol that relies on a mathematical formula to price assets. How are such AMMs different from traditional finance market makers? Unlike centralized market makers who operate on exchanges with the goal of profiting from the spread between buy and sell orders, AMMs enable decentralized liquidity provision without relying on an order book or centralized intermediaries such as market makers and brokers.

Instead of institutions or human traders setting prices, AMMs use smart contracts to determine asset prices and facilitate trades automatically based on supply and demand within liquidity pools. These pools, which are often filled by individual users, allow anyone to provide liquidity and earn fees, creating a decentralized alternative to the traditional market-making model.

How does an AMM work exactly?

AMMs rely on liquidity pools, which are collections of two or more cryptocurrencies (tokens) locked in a smart contract. These pools enable traders to swap tokens without the need for an order book or counterparty.

Liquidity-providers or LPs contribute their tokens to these pools. For example, in a USDT/ETH pool, an LP might deposit an equal value of USDT and ETH. In exchange for providing liquidity, LPs receive LP tokens, representing their share in the pool. These LP tokens can be redeemed for the proportion of liquidity they provided, plus any fees earned.

When a trader wants to swap one cryptocurrency for another (e.g., from USDT to ETH), they interact with the AMM's liquidity smart contract.

Instead of using an order book to match buy and sell orders, the AMM uses a mathematical formula to determine the price. There are a number of formulas but one common formula is the constant product formula (used by Uniswap), which is expressed as:

X * Y = K

Where:
X = the amount of Token 1 in the pool
Y = the amount of Token 2 in the pool
K = a constant that must remain the same after every trade.

The constant product formula is also known as the bonding curve.

The idea is that the product of the amounts of the two tokens must always equal a constant. When a user swaps one token for another, the amounts in the pool change, which causes the price of the tokens to adjust according to the formula.

When a trade happens, the amount of one token increases while the amount of the other decreases. This change alters the price based on the constant product formula.

For example, if a trader swaps USDT for ETH, the supply of USDT in the pool increases, and the supply of ETH decreases. The price of ETH (in terms of USDT) rises because there is less ETH available in the pool, while USDT becomes relatively more abundant.

This price adjustment can lead to slippage (the difference between the expected price and the executed price). Large trades, relative to the pool size, can cause significant slippage.

AMMs typically charge a small fee (usually around 0.3% per transaction). This fee is added to the liquidity pool, and LPs earn a proportional share of the fees based on the amount of liquidity they’ve contributed. At the end of each trade, the bonding curve also extracts and enriches the LP’s contribution (see the right-hand column of the BIS image above).

Some popular decentralized exchanges that run on AMMs include UniSwap, SushiSwap, PancakeSwap, and Balancer.

However, their open and permissionless nature also makes them susceptible to manipulation. While AMMs provide liquidity and efficiency, they can be exploited through tactics like wash trading and artificial volume inflation, which distort market perceptions and mislead investors. Regulators have taken notice of such abuses, leading to increased scrutiny of market participants. A striking example of enforcement action in this space is the case against Gotbit Consulting LLC, which allegedly engaged in manipulative trading practices.

Case Study: Actions Against Gotbit

In October 2024, the U.S. Department of Justice (DOJ) and the SEC initiated coordinated actions against Gotbit Consulting LLC, its CEO Aleksei Andriunin, and associated entities, alleging extensive market manipulation and securities fraud within the cryptocurrency sector. Gotbit engaged traded on both CEXes and DEXes, particularly Bitmart and Uniswap, as alleged in the SEC Complaint discussed below.

DOJ Indictment: United States v. Gotbit Consulting LLC et al.

The DOJ charged Gotbit Consulting LLC, directors Fedor Kedrov and Qawi Jalili with wire fraud, and conspiracy to commit wire fraud and market manipulation.

The defendants allegedly engaged in wash trading to artificially inflate trading volumes of specific cryptocurrencies, creating a deceptive appearance of market activity. As part of “Operation Token Mirrors,” the FBI created a fictitious token, NexFundAI, and enlisted Gotbit’s services. Gotbit purportedly increased the token’s trading volume from approximately $330,000 to $1 million within hours, demonstrating their capacity for market manipulation.

The indictment alleges that Gotbit’s business model revolved around manipulating market data to make low-liquidity tokens appear more active, deceiving retail traders and cryptocurrency exchanges.

In a related but separate case United States v. ALEKSEI ANDRIUNIN a/k/a Alex Andryunin, the DOJ has indicted Aleksei Andriunin, the CEO and sole owner of Gotbit Consulting LLC, on multiple counts, including wire fraud, conspiracy to commit market manipulation and wire fraud, and conspiracy to commit money laundering.

While the broader indictment against Gotbit targeted the firm’s executives and its general business operations, Andriunin is being prosecuted individually due to his direct involvement in the alleged fraudulent activities.

According to court filings, Andriunin personally orchestrated Gotbit’s market manipulation schemes, leveraging proprietary trading algorithms designed to artificially boost cryptocurrency trading volumes. These algorithms executed wash trades to create the illusion of liquidity and demand. Internal communications obtained by investigators reveal that Andriunin actively marketed these services to crypto projects, promising to make their tokens appear more “legitimate” to investors and exchanges.

Beyond just developing the technology, Andriunin was allegedly the primary point of contact for clients, personally managing relationships with token issuers seeking to inflate their trading volumes. He controlled key cryptocurrency wallets used to receive client payments, which were later funneled into various accounts, including his Binance US account. This financial trail, authorities claim, is central to the money laundering allegations against him.

If convicted, Andriunin and the other defendants face up to 20 years in prison for wire fraud, along with additional penalties for conspiracy and money laundering.

SEC Complaint: Securities and Exchange Commission v. Gotbit Consulting LLC et al.

The SEC’s civil complaint accuses Gotbit Consulting LLC and marketing director Fedor Kedrov of violating federal securities laws by engaging in fraudulent trading practices.

The complaint alleges violations of Sections 17(a)(1) and (3) of the Securities Act of 1933, and Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934, along with Rules 10b-5(a) and (c). The SEC contends that Gotbit’s actions misled investors by fabricating the appearance of active trading markets, thereby influencing investment decisions.

The SEC seeks permanent injunctions, disgorgement of ill-gotten gains with interest, and civil penalties to prevent future violations.

What exactly Gotbit did wrong as per regulators?

• Wash Trading: The defendants allegedly engaged in wash trading, executing trades between accounts they controlled to create the illusion of higher trading volumes for certain cryptocurrencies. This deceptive practice aimed to mislead investors about the liquidity and popularity of these assets.
• Market Manipulation Services: Gotbit purportedly offered “market-manipulation-as-a-service,” assisting clients in artificially inflating the trading volumes and prices of their crypto assets on CEXes and DEXes. This service was designed to attract unsuspecting investors by presenting manipulated market data.
• Securities Fraud: Gotbit and Kedrov were charged with violating provisions of the Securities Act of 1933, and the Securities Exchange Act of 1934, that prohibit fraudulent activities in the offer and sale of securities, including schemes to defraud and obtaining money or property by means of false statements.
• Market Manipulation: The SEC alleged that Gotbit engaged in practices that manipulated the market for certain crypto assets, creating artificial trading volumes and misleading investors about the genuine demand for these securities.

Both proceedings underscore the U.S. government’s commitment to enforcing legal standards in the cryptocurrency industry, emphasizing that:

• Jurisdictional Reach: Although Gotbit Consulting LLC is legally registered in Belize, its extensive operations involving U.S. clients and financial systems placed it within the jurisdiction of U.S. regulators. The SEC and the DOJ assert that the company’s business activities — despite being based offshore — were deeply entangled with the U.S. financial ecosystem, making it subject to American laws.
  
  Gotbit’s involvement with U.S.-based investors, cryptocurrency exchanges, and token issuers provided clear grounds for regulatory action. The company actively solicited business from U.S. clients, participated in major U.S. blockchain conferences, and even set up an accelerator program in California to attract emerging crypto projects. Internal communications obtained by investigators confirm that Gotbit planned further U.S. expansion, including hiring personnel and establishing a physical presence in the country.
  
  Additionally, the company routed substantial funds through U.S.-regulated crypto exchanges, including Binance US and other platforms subject to U.S. AML and KYC regulations. Such financial interactions provided further evidence that Gotbit was operating within the U.S. regulatory sphere.‍
• Executive Accountability: Corporate leaders may be held personally liable for orchestrating fraudulent schemes. Not just Gotbit as an entity but Mr. Andryunin as its CEO were targeted by DOJ, and Mr. Andryunin faces potential imprisonment for the alleged wrongdoings.‍
• No Safe Haven for Manipulation: Artificial volume inflation and deceptive practices can trigger severe legal consequences.‍
• Regulatory Collaboration: The DOJ and SEC are actively coordinating to detect and prosecute market manipulation in digital assets.

This case serves as a critical reminder of the legal obligations within the cryptocurrency market and the severe consequences of fraudulent activities. The Complaint and Indictment do not draw a line between alleged conduct on CEXes and DEXes, focusing on the fact of manipulation and wash trading itself. Thus, potentially not just MMs but larger traders and liquidity providers may be a target of the next legal action.

Practical Guidance for MM founders

As a founder of an MM, your primary goal is to maximize profits while staying in line with the rules and regulations to the extent they apply to your business. Recent enforcement actions like those against Gotbit make it clear that ignoring or skirting legal requirements can lead to devastating consequences. Below are specific actions to take — and avoid — when operating in this space.

What Not to Do

1. Do Not Engage in Wash Trading or Fake Volume Creation^‍
   ‍Avoid trading between accounts you or your firm controls to simulate activity. This is a form of market manipulation and is explicitly illegal under U.S. and other jurisdictions’ laws.
   ‍
   ‍Example: Avoid the temptation to inflate a token’s volume on DEX to make it appear more active and attractive to investors.

2. Do Not Misrepresent Your Activities to Clients or Investors
   ‍Be transparent about your strategies and services. Misleading clients, exchanges, or investors regarding how you generate liquidity or stabilize prices can lead to fraud charges.

3. Do Not Assume Offshore Registration Shields You from U.S. or Global Laws
   Conduct impacting U.S. investors or occurring on U.S.-regulated platforms will likely subject you to U.S. jurisdiction. Similarly, other major jurisdictions (e.g., EU, Singapore) are actively closing gaps in enforcement against foreign entities.

4. Do Not Ignore Regulatory Red Flags for Tokens
   Avoid engaging in market-making for tokens that may be classified as securities unless you are fully compliant with applicable securities laws. Consult legal counsel to evaluate tokens before committing to deals.

What to Do

1. Implement Transparent and Compliant Trading Strategies
   Focus on legitimate market-making techniques that improve liquidity without manipulation. This includes providing tight spreads, ensuring sufficient depth in order books, and maintaining fair trading practices.
   ‍
   Document all strategies and ensure they align with both exchange policies and regulatory standards.

2. Conduct Due Diligence on Tokens and Clients
   Before agreeing to provide market-making services, evaluate whether the token is likely to be classified as a security and whether the issuer complies with necessary regulations.
   ‍
   Vet clients to avoid working with high-risk or fraudulent projects. Use tools for AML/KYC checks to ensure compliance.

3. Separate Operational Funds from Client Funds
   Keep client funds in segregated accounts and use them only for agreed purposes. This reduces the risk of misappropriation allegations and protects both you and your clients.

4. Establish Robust Internal Controls
   Use advanced monitoring systems to flag unusual trading patterns and prevent manipulative practices from occurring accidentally or through rogue employees.
   ‍
   Ensure all employees are trained to understand compliance risks and regulatory obligations.

5. Work with Legal and Compliance Experts
   Hire specialized legal counsel to review contracts, evaluate risks, and provide guidance on cross-border operations.
   ‍
   Consider consulting firms experienced in securities and commodities regulations to regularly audit your practices.

6. Maintain Clear Documentation for All Activities
   Keep thorough records of all trades, agreements, and communications with clients and exchanges. This protects you in the event of regulatory inquiries or disputes.

7. Build Relationships with Reputable Exchanges and Partners
   Prioritize working with established, compliant exchanges that have clear market-making policies. Avoid operating on platforms known for regulatory violations or lax oversight.