- An SEC tip led federal prosecutors to create a fake company to take down crypto market manipulators.
- The companies are accused of “wash trading,” artificially increasing trading volume to drive up token prices.
- According to prosecutors, this is the first such charge against crypto companies.
Federal prosecutors are getting creative to catch bad actors in the cryptocurrency market.
After receiving a tip from the Securities and Exchange Commission, federal prosecutors created a fake crypto company to investigate a Boston-based company.
The ensuing sting operation dismantled four companies, seized more than $25 million in crypto and disabled approximately 60 different cryptocurrencies, Boston prosecutors said in a press release Thursday.
The companies and more than a dozen individuals have been charged with market manipulation aimed at increasing the value of the tokens, as well as fraud and conspiracy to commit fraud. These accusations are the first in the crypto industry related to “wash trading.”
This practice involves moving assets between accounts controlled by the same company, giving the appearance of higher trading volume and artificially increasing the value of the asset.
The attack came after the SEC notified the FBI of possible market manipulation by a Boston-based crypto company called Saitama, which at one point boasted a market value in the billions, according to the press release.
This trick prompted prosecutors to launch a fake crypto company called NexFundAI and create a fake token. During the months of operation, the FBI observed three market makers laundering trading tokens for crypto clients, offering to manipulate the price of NexFundAI’s token via video calls and Telegram chats.
The attack accused ZM Quant, CLS Global, and MyTrade of fictitious transactions related to their communications with NexFundAI. A fourth company, Gotbit, was not involved in NexFundAI but was accused of a similar scheme. The attack also indicted 15 people, including six people associated with Saitama.
The companies’ trading scheme “allegedly defrauded honest investors out of millions of dollars,” Jodi Cohen, special agent in charge of the FBI’s Boston division, said in a statement.
Prosecutors say the charges are the first of their kind in the crypto industry, even though the practice of wash trading has been banned and strictly enforced in other financial markets.
“Cryptocurrency is no exception. These are cases where an innovative technology – cryptocurrency – meets a century-old system – pump and dump. Today’s message is that if you make false statements to mislead investors, that’s fraud, period,” the acting U.S. said. Attorney Joshua Levy said in a statement released Wednesday.
The accusations come as crypto-related scams are on the rise. The FBI’s 2023 Internet Crime Report shows that crypto fraud cost investors nearly $4 billion last year. One type of scam, “pig butchery,” has stolen at least $75.3 billion in cryptocurrencies in recent years, according to a study.