In a groundbreaking operation, the U.S. Federal Bureau of Investigation (FBI) has exposed an alleged widespread crypto market manipulation scheme involving 18 individuals and four major crypto firms. The case’s investigation saw the agency launch its own Ethereum-based token called NexFundAI.
The indictment, unsealed in a Boston federal court, alleges that the defendants engaged in “wash trading” and other deceptive tactics to inflate the value of various crypto tokens. Wash trading is the practice of creating artificial trading activity to mislead investors, where the same entity both buys and sells an asset to create the illusion of high demand. The FBI’s token was launched in a bid to infiltrate the firms offering market manipulation services.
The agency’s operation revealed that Gotbit, ZM Quant, CLS Global, and MyTrade were among the companies involved in the fraudulent activities.
Jodi Cohen, an FBI Special Agent in charge of the Boston Division, noted that the move was “unprecedented” and was meant to “identify, disrupt, and bring these alleged fraudsters to justice.”
The indictment alleges that the defendants manipulated the prices of over 60 cryptocurrency tokens, including the Saitama Token, which at one point had a “multi-billion-dollar market value.”
According to the document, the defendants used deceptive tactics to attract new investors “which resulted in an increase in the tokens’ trading prices,” to then sell their own tokens at artificially inflated prices in pump and dump schemes.
To execute the wash trades, the defendants employed market makers like ZM Quant and Gotbit, which would execute sham trades using multiple wallets, creating the illusion of legitimate trading activity and making the tokens appear more attractive to investors.
One market maker who pleaded guilty described the tactics as finding buyers from the cryptocurrency to make them “lose money in order to make a profit.”
The FBI has seized more than $25 million in cryptocurrency and deactivated trading bots responsible for millions in wash trades. Several defendants have already pleaded guilty or agreed to do so, and others have been arrested in the United States, the United Kingdom, and Portugal.
Assistant US Attorney Joshua Levy said in a statement that wash trading is a long-established illegal practice in traditional financial markets, and the same rules apply to the cryptocurrency industry. Levy added:
These charges are also a stark reminder of how vigilant online investors must be and that doing your homework before diving into the digital frontier is critical. People considering making investments in the cryptocurrency industry should understand how these scams work so that they can protect themselves.
The defendants face up to 20 years in prison on charges of market manipulation and wire fraud. The U.S. Securities and Exchange Commission has now filed civil complaints alleging violations of securities laws in “relation to the conduct at Gotbit, CLS, ZM Quant, Saitama and Robo Inu.”
Featured image via Unsplash.
