According to the latest news report by Bloomberg, the United States’ Department of Justice as initiated a criminal investigation as to whether there are price manipulations being carried out by traders in the cryptocurrency market.
This news was given to Bloomberg by four people who are close to the matter but wish not to be named due to the sensitivity of the probe. The focus of the investigation is on the price of Bitcoin and Ethereum.
According to these sources, the investigation is focused on the illegal practices that influence price changes in the cryptocurrency markets. These practices include spoofing as well as wash trading.
Spoofing happens when a trader places a large number of orders, with the express purpose of manipulating the price of an asset. These orders are later cancelled once the desired price movement is achieved. Flooding the market with fake orders tricks genuine investors into buying or selling the asset, depending on what the scammers are trying to achieve.
Wash Trading, on the other hand, is when a trader trades with himself to give the impression that there is a huge demand for that particular asset. This fake trading then attracts innocent investors who believe that the asset is a worthwhile investment.
The sources said that the US federal investigators are working with the Commodity Futures Trading Commission (CFTC) in this probe. The CFTC also oversees the derivatives that are tied to Bitcoin.
There are many reasons why the authorities are worried that the cryptocurrency market is rife with illegal activities. Firstly, there is a lot of skepticism about whether exchanges are actively chasing down scammers. Secondly, the extreme volatility of the cryptocurrency market – wild and sudden price swings – tends to indicate that there are some price manipulations at play. And finally, the lack of stringent regulations as there are in the traditional financial markets also lends to lawlessness.
It also doesn’t help that cryptocurrency trading is scattered across dozens of trading platforms across the world and that many of these platforms are not registered with any government agency, i.e. they are completely unregulated. The challenge government watchdogs also face is that they don’t regulate the spot market – the platforms where the actual trading of coins takes place (vis-à-vis trading in futures based on the cryptocurrencies like Bitcoin).
In December, the world saw Bitcoin and other cryptocurrencies reach dizzying heights. This attracted the less savvy mom-and-pop investors, who had no clue about the dangers and risks involved in investing in such markets.
It was these concerns that led China to ban cryptocurrency trading last year. South Korea, the hub of cryptocurrency trading, also came down hard on the cryptocurrency market. Likewise, it also led the Philippines and Japan to institute regulations for the cryptocurrency market, which contributed to the drop in Bitcoin’s price since its massive highs in December last year.
This investigation is the United States’ latest effort in cracking down on corruption in the burgeoning cryptocurrency industry. Previously, the Securities and Exchange Commission (SEC) launched numerous investigations into dozens of Initial Coin Offerings (ICOs), because of the suspicion of scams.
The good news is that many exchanges are beginning to realize that the cryptocurrency industry’s growth will be hurt if too many investors may be put off because of a “buyer beware” approach that platforms currently have. This means that buyers are at risk of being scammed.
Thus, exchanges are now banding together – like the Winklevoss Twins (owners of the crypto exchange Gemini) – to form a body that would act as a self-regulator for the cryptocurrency industry.