Market Makers Gone Rogue Are Caught Red-Handed In An FBI And SEC Joint Investigation
“These are cases where an innovative technology – cryptocurrency – met a century-old scheme – the pump and dump."
The FBI and SEC have unlocked a new fear for crypto investors.
A joint investigation by the two United States government agencies found that four market makers were manipulating the cryptocurrency market by creating the illusion of high trading volumes to pump the price of tokens they would later sell at an inflated price.
Market makers play an essential role in providing liquidity to both traditional and cryptocurrency markets. They own a large inventory of financial assets, which they deploy to ensure that enough stocks and digital currencies are available for trades at competitive market prices at all times.
Three of these entities—ZM Quant, Gotbit, and CLS Global—claimed to be market makers but were, in fact, providing “market manipulation-as-a-service,” claims the Securities and Exchange Commission.
In a practice known as wash trading, they would use bots to generate “quadrillions of transactions and billions of dollars of artificial trading volume each day” to lure other investors with a fake inflated price of certain tokens. Then, at a peak, they would sell the tokens they owned.
The SEC concluded that their activities “served no economic purpose” and worked only for their enrichment and that of their associates.
On Wednesday, the regulatory agency charged them with fraud and, in the same process, implicated two crypto projects of fraudulent sales of crypto assets- Saitama and Rob Inu - and nine individuals related to the duplicitous acts.
The SEC worked in parallel with the Federal Bureau Of Investigation, which took the “unprecedented step of creating its very own cryptocurrency token and company” to uncover the criminal activities.
The FBI's token, NexFundAI, allowed the agency to infiltrate the businesses of so-called market makers and catch them red-handed.
One of the defendants who agreed to plead guilty in the FBI case explained his business to prospective clients. He said the purpose was to find “other buyers from the community, people you don’t know about or don’t care about.”
“We have to make [the other buyers] lose money in order to make profit,” he said, unknowingly incriminating himself.
The investigation of the intelligence arm of the Justice Department culminated in the charges of 15 individuals and three companies—ZM Quant, CLS GLobal, and MyTrade—of wash trading NexFundAI.
GotBit, its CEO, and two of its directors were also found to have incurred in similar schemes.
The federal agency collected $25 million worth of cryptocurrency and deactivated “multiple trading bots responsible for millions of dollars’ worth of wash trades for approximately 60 different cryptocurrencies.”
Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement, warned, “Investors should be mindful that the deck may be stacked against them.”
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