The Justice Department is investigating possible collusion among cryptocurrency traders who may be manipulating the price of Bitcoin, Ethereum and other cryptocurrencies.
ICO scams in the cryptocurrency space have already lured thousands of unsuspecting investors. Regulators from the US and Canada recently announced Operation Cryptosweep to combat dozens of suspicious offerings that appear to be masquerading as legitimate cryptocurrency and blockchain projects.
As reported by Bloomberg, regulators are weighing the likelihood that colluding traders are making the price of several cryptocurrencies to rise and crash artificially for personal gain.
The Winklevoss twins, who own and operate digital asset exchange Gemini, have been proactive in addressing market manipulation. They’re implementing Nasdaq’s SMARTS Market Surveillance technology to monitor activity across all of its trading pairs, including BTC/USD, ETH/USD and BTC/ETH.
Coordinated efforts to jack up the price of a coin are well known among some Telegram groups, where participants await buy and sell signals for a specific coin. Once a coin is pumped by buyers who are on the inside, unsuspecting buyers leap in, further increasing the price. Sophisticated scammers assess daily trading volume on any particular coin to calculate when their group should sell after the artificial rise in order to reap the greatest profits. Some groups even tier the target sell-off prices in order to signal modest, medium or big gains. The higher the alleged gain, the longer the hold, the greater the risk. Once the group sells across all tiers, the coin comes crashing down, leaving buyers on the outside with proverbial “shitbags” – coins that are suddenly and rapidly devalued.
Pump and dump practices, along with unethical and illegal ICOs, have created legitimate fears in a space that is still largely unregulated. While crypto enthusiasts champion liberation from banks and overbearing governments, many are looking to state regulators to clean up the mess.
The Justice Department will look into malicious trading techniques such as spoofing, a disruptive trading practice used by unscrupulous traders who create massive buy or sell walls to give the illusion of high or low demand, thereby raising or lowering the price of a coin. The orders are quickly canceled as soon as the price moves as intended. The spoofer can then profit by timing actual buy and sell orders.
Wash trading is another market manipulation tactic where a trader both buys and sells shares to create the illusion of market activity to sway price action and volume.
The rise of the Bitcoin futures market in December 2017 has created its own unique set of regulatory challenges to try to eradicate market manipulation, just as it does in the traditional derivatives market.
Compliance is still lacking in all areas of the market with shoddy ICO projects, spoof traders, pump-and-dump whales, hackable exchanges and non-compliant account holders engaged in money laundering and other illicit activities. As 2018 proves to be the year of cryptocurrency regulation, it demands monumental effort from coordinated regulatory teams across borders to root out the crooks, scammers and cheaters.
Says Andy Bromberg, co-founder and CEO of CoinList, a technology platform that connects accredited investors with vetted blockchain projects, “The nascent crypto markets aren’t exempt from existing regulations around market behavior, and will see a series of enforcements and clarifications mirroring those that have happened in the equities, commodities and securities markets over the past decades. We’re excited to see the space continue to professionalize and abide by tried-and-true legal frameworks.”