FBI Launches Fake Cryptocurrency to Bust Crypto Market Manipulation Scheme

The Federal Bureau of Investigation (FBI) launched a fake cryptocurrency, NexFundAI, as part of a wide-ranging sting operation to expose market manipulators in the cryptocurrency industry, according to a recent report from Fortune.

Together with the Department of Justice (DOJ), 18 individuals and companies were charged with defrauding investors, manipulating crypto markets for profit, and artificially inflating cryptocurrency token prices. 

This marks the first time the DOJ has brought a criminal case against firms for market manipulation in the cryptocurrency space.

Unprecedented Move by the FBI

According to Jodi Cohen, Special Agent in Charge of the FBI’s Boston Division, the Bureau took this step to identify and dismantle fraudulent actors in the market. NexFundAI was designed to attract the services of crypto firms that engage in market manipulation practices such as wash trading, where fake buy and sell orders are used to create the illusion of demand.

The FBI’s fake cryptocurrency served as bait to expose companies involved in artificially boosting the trading volume and prices of various tokens. 

Four prominent crypto firms, Gotbit, ZM Quant, CLS Global, and MyTrade, were among those implicated. These firms were allegedly responsible for using bots and fake transactions to manipulate over 60 tokens, including the Saitama Token, which once had a market capitalization of $7.5 billion.

The Market Manipulation Scheme

The individuals and firms involved in the scheme are accused of employing deceptive tactics to inflate the value of tokens, mislead investors, and profit from artificially inflated prices. 

One of the main strategies used was wash trading, where market makers would execute trades using multiple wallets to create fake volume. This made the tokens appear more desirable to unsuspecting investors.

The operation targeted tokens such as Saitama, a Massachusetts-based cryptocurrency whose executives allegedly conspired with market makers to pump up the token’s value. 

After artificially inflating the prices, the conspirators cashed out, defrauding investors in a classic "pump and dump" scheme. Gotbit, ZM Quant, and other market-making firms were accused of providing wash trading services in exchange for payments.

One employee from ZM Quant reportedly admitted that their goal was to “make other buyers lose money in order to make a profit,” revealing the extent of the manipulative tactics used by these firms.

Legal Action and Seizures

As a result of the sting operation, more than $25 million in cryptocurrency has been seized, and several trading bots responsible for millions of dollars in wash trades have been deactivated. 

Authorities have apprehended several defendants across multiple countries, including the US, UK, and Portugal. Five individuals have already pleaded guilty or agreed to do so.

The DOJ and FBI worked in tandem with international law enforcement to bring the alleged fraudsters to justice. In addition to the criminal charges, the Securities and Exchange Commission (SEC) has filed civil complaints against several of the firms involved for violating securities laws.

Market manipulation is not new to the financial world. Pump-and-dump schemes, where the price of an asset is artificially inflated to lure in investors before dumping the asset at a profit, have been around for over a century. 

However, the rise of cryptocurrencies has given new life to these tactics. Wash trading, in particular, has become a common practice on offshore crypto exchanges, where analysts estimate that up to 50% of trading volume is fake.

The FBI’s sting operation is a stark reminder of the ongoing risks associated with investing in cryptocurrencies. It also signals that regulators are increasingly turning their attention to crypto markets, targeting those who seek to exploit the system for profit.