US Authorities Probe Cryptocurrency Price Manipulation - Report

The DoJ-CFTC criminal investigation is focused on pump and dump practices that can influence Bitcoin and other digital currencies trading.

by Marin Marinov
25 May • 3 min
In Markets

The US Department of Justice (DoJ) has launched a criminal probe into a suspected cryptocurrency price manipulation, Bloomberg reported on Thursday citing four separate sources. DoJ is working with the Commodity Futures Trading Commission (CFTC), the market regulator, to investigate whether traders are using illegal practices to influence the price Bitcoin (BTC), Ethereum (ETH) and other virtual currencies.

Bitcoin and Ethereum are the only two coins pointed by name in the Bloomberg report. Bitcoin was down nearly 3% on Thursday and is again in the red on Friday with a 1.4% decline at the time of publishing, while ETH is up 1.6% after a slight decrease yesterday.

The investigation

The criminal probe, which is in early stages, is focused on two particular pump and dump techniques, spoofing and wash trading, according to the unnamed people familiar with the probe:

- spoofing is a practice when traders create fake demand by flooding the market with hoax orders and thus tricking other, unsuspecting, investors to buy or sell. Once prices move in the desired direction, the manipulators cancel the orders;

- wash trading is also related to the creation of fake demand, but involves simultaneous sales and purchases of one and the same financial instrument by a trader who wants to trick other players to also dive in.

These kinds of manipulation enabled hackers to steal nearly BTC 650 000 in June 2011 from now closed Japanese exchange Mt. Gox. During the attack, bots made several hoax orders that appeared to be valid, but actually nobody owns the cryptocurrency behind those fake trades.

The news about the investigation comes several days after a joint North American regulators operation called Cryptosweep that resulted in 70 investigations and 35 enforcement actions.

Cryptocurrency and US regulators

CFTC does not have the authority to regulate the actual trading of digital coins (spot market) because it is a derivatives watchdog. However, if the Commission finds irregularities in spot markets, it can impose sanctions.

Last year, the regulator gave the green light for listing of Bitcoin-backed futures to two Chicago exchanges, CBOE and CME. After criticism from the Futures Industry Association (FIA) for not taking enough measures against the “potential risks” of cryptocurrency futures products, CFTC has recently published new guidelines for digital coin derivatives.

At the beginning of May, CFTC commissioner Brian Quintenz said the agency set up a special task force to “prosecute fraud in this evolving asset class” and emphasized that CFTC is particularly focused on “fraud, market manipulation and disruptive trading involving virtual currency”.

The other major US regulator, the Securities and Exchange Commission (SEC), recently launched a fake Initial Coin Offering (ICO), dubbed HoweyCoins, which aims to educate individual investors about the perils of participating in this form of fundraising.