Earlier today, Bloomberg released an article announcing that the United States Justice Department has opened criminal probes into Bitcoin and other digital currencies being manipulated when it comes to price. (In an ironic twist, just before the article went public, more than 2,000 bitcoin were sold at market value driving the price down even further.)
The Justice Department is focusing on illegal practices that might be able to influence prices such as spoofing, which is flooding the market with fake orders to trick others into buying or selling. The federal prosecutors are working with the Commodity Futures Trading Commission to conduct the investigation.
The deregulated nature of cryptocurrencies, and the lack of regulations policing exchanges and forcing them to pursue cheaters, make virtual currencies highly susceptible to fraud, according to authorities. These are the same fears that have previously caused countries such as China to ban cryptocurrency exchanges, and others such as Japan to begin regulating them.
In addition to spoofing, investigators are also looking into wash trading, which is when a trader conducts trades with themself, to generate false market demand and causes others to jump in. The Justice Department is mainly investigating Bitcoin and Ethereum.
The investigation is just beginning, but this isn’t the first time the US government has taken a look at cryptocurrencies. The limited oversight and deregulated nature of cryptocurrencies does make crypto trading an enticing target for crooks.
According to University of Texas finance professor John Griffin, “There’s very little monitoring of manipulative trading, spoofing and wash trading. It would be easy to spoof this market.”
Several large platforms such as the Winklevoss twins’ Gemini Trust Co. have recognized that the “wild west” nature of crypto trading may be stifling its growth, as many consider exchanges to have a “buyer beware” tag connected to them. Gemini has hired Nasdag to surveil the digital coin trading on their exchange, and has urged other platforms to form a group that could serve as a self regulator for the crypto trading industry.
Crypto manipulation has long been a problem, with several groups and individuals being identified in the past who have placed over $1 million worth of orders without executing them.
