The Justice Department is opening a criminal investigation, along with the Commodity Futures and Trading Commission, into people who may be manipulating cryptocurrencies like Bitcoin and Ether, Bloomberg reported on Thursday.
Sources familiar with the probe told Bloomberg that investigators are in the early stages of examining illegal practices that unscrupulous traders have also been known to use in futures and equities markets. For example, the DOJ is looking into “wash trades,” which involves bad actors trading with themselves to create the illusion of market demand, and “spoofing,” which involves bad actors submitting and then cancelling a bunch of orders to influence a coin’s price. In one particularly egregious case of spoofing, a trader reportedly placed and then cancelled $1 million worth of orders.
There are also legal methods that traders employ to distort markets, like pumping and dumping, which involves artificially inflating the price of a coin and then selling it before others can cash out. The schemes are more common with smaller, lesser-known cryptocurrencies, since a group of people colluding together can more easily influence the price. Such practices are illegal when it comes to securities, but there are no corresponding laws with it comes to cryptocurrency exchanges.
Authorities are reportedly concerned that cryptocurrency prices are particularly prone to fraud because the markets are largely unregulated and often fluctuate wildly, which can make it difficult to distinguish cheating from natural trends. This vulnerability to manipulation is part of the reason why countries have placed cryptocurrencies under regulation. Japan, for example, has required exchanges to register with the government. South Korean prosecutors also raided the country’s largest cryptocurrency exchange earlier this month on suspicion of fraud. China banned cryptocurrency exchanges altogether. The U.S. has relatively few laws that apply to cryptocurrencies, though Securities and Exchange Commission has been pushing for stronger regulations. Such markets are often regulated on the state level.
Regulators with the SEC have lately been struggling to reign in scam initial coin offerings (ICO), a procedure by which new cryptocurrencies distribute coins to investors. SEC chairman Jay Clayton testified before the Senate in February about people failing to follow securities laws when conducting their ICOs, claiming that they often resort to “semantic gymnastics or elaborate structuring exercises” to avoid regulations.