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In a groundbreaking move, the US Department of Justice (DOJ) has charged eighteen individuals and companies with manipulating cryptocurrency markets, marking the first criminal prosecution of financial services firms involved in such activities.
The case, unsealed by a federal judge on Wednesday, reveals a sophisticated scheme aimed at inflating the value of cryptocurrency tokens through illegal practices.
Central to the investigation was the Federal Bureau of Investigation’s (FBI) unique approach: the creation of its own cryptocurrency token, named NexFundAI, and a fake company to infiltrate and expose those orchestrating market manipulation.
The DOJ complaint outlines how this undercover operation targeted a prominent cryptocurrency firm with a multi-billion-dollar market value.
First criminal case against financial firms in crypto
This case represents the first time the DOJ has charged financial firms, as opposed to individuals, for crypto-related market manipulation.
Previously, the DOJ had prosecuted Avraham Eisenberg, who was convicted in April for his involvement in rigging the Mango Markets platform.
The FBI’s sting operation, however, introduced a new level of creativity in law enforcement tactics.
According to a report in Fortune, Jodi Cohen, the special agent leading the Boston FBI office, stated that the agency had taken an “unprecedented step” in designing a new cryptocurrency token and using it as bait to lure alleged manipulators.
This strategy, according to Cohen, played a pivotal role in capturing those responsible for artificially boosting token prices.
Age-old scheme in a new industry
While cryptocurrency may be a relatively new financial landscape, the methods used to manipulate it are not.
The complaint describes the manipulation tactics employed by the defendants, such as wash trading—a practice where fake buy and sell orders are created to simulate market demand—as a “century-old scheme.”
Market manipulation has been a known issue in the cryptocurrency sector for years.
Offshore exchanges, in particular, are notorious for inflating token prices, with some analysts estimating that up to 50% or more of all trading volumes are artificially boosted through deceptive practices.
NexFundAI: a token created to expose fraud
The FBI’s creation of NexFundAI, which operated on the Ethereum blockchain, allowed agents to approach key market players under the guise of seeking their illicit services.
One of the defendants, who referred to himself as the “mastermind,” described how his company used automated bots to execute simultaneous buy and sell orders on centralized exchanges to increase trading volume.
In September, the defendant requested a $2,000 upfront payment for his services, and as recently as last week, his company’s bots were still conducting millions of dollars in wash trades.
Law enforcement eventually intervened, deactivating the bots.
Interestingly, according to DEX Screener, a crypto price tracking service, NexFundAI is still actively traded with a market capitalization of around $237,000, even after the bust.
Saitama and Gotbit: a $7.5 billion pump-and-dump scheme
Among the key players in this scheme was Saitama, a Massachusetts-based crypto firm.
According to the DOJ, Saitama worked with a market maker named Gotbit to inflate the value of its token to an extraordinary $7.5 billion.
Executives at Saitama were allegedly selling their tokens in secret, raking in tens of millions of dollars in profits from the inflated market.
Gotbit, which had previously been flagged for unethical behavior, played a significant role in this manipulation.
A cofounder of Gotbit had admitted to CoinDesk in 2019 that the company’s practices were “not entirely ethical.”
International defendants and broader legal actions
Several defendants operated internationally, with key players based in Portugal and Russia.
Five of the defendants have already pleaded guilty or agreed to cooperate with the DOJ in exchange for more lenient sentences.
In addition to the criminal charges brought by the DOJ, the Securities and Exchange Commission (SEC) has filed separate civil complaints, accusing the market-making firms of violating US securities laws.
This case sets a significant precedent in the world of cryptocurrency regulation and could signal a more aggressive stance by US authorities in combating fraudulent practices within the industry.
The DOJ’s successful prosecution, bolstered by the FBI’s undercover work, highlights the growing sophistication of law enforcement in tackling financial crimes in the digital age.
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