The US Department of Justice has launched an investigation into possible crypto price manipulation by crypto traders, reports Bloomberg. Quoting four people familiar with the situation, the report indicates that the DOJ’s prosecutors are working in partnership with the Commodity and Futures Trading Commission to probe the matter. The DOJ believes that digital currencies are highly susceptible to fraud, especially given the sector’s lack of regulation.
Fake Orders And Spoofing
The investigation will focus on a number of illegal activities that traders can use to manipulate the price of cryptos, one of which is spoofing. Spoofing is when traders initiate large orders to give the illusion that the demand for crypto is high, before canceling them once the price is observed to have moved in a particular direction. This practice has been witnessed in the market before. Another illegal activity which will be investigated is wash trading, a practice in which a trader essentially sells Bitcoin to him or herself, further creating the illusion of high market demand which influences the price.
According to sources, Bitcoin and Ether are the two digital currencies that are under investigation. The news comes as the price of Bitcoin and most cryptocurrencies has taken a nosedive in the wake of increased regulatory concern. With the markets still being largely speculation-driven, negative news has continued to instill both fear and caution in traders, which has led to reduced demand and subsequent price declines.
In the past, crypto exchanges themselves have been accused of perpetrating fake trading and spoofing. In a blog post, crypto trader Sylvain Ribes exposed a scam in which major crypto exchanges had allegedly fabricated up to 90% of their daily trading volumes. According to the post, OKEx, the biggest exchange globally, was the biggest culprit, with 93% of its trades having been fabricated. Other exchanges which were accused of the same behavior include Huobi (80%), HitBTC, and Binance. Ribes also raised concern over Chinese exchanges which were relatively unknown but boasted very high trading volumes, sometimes higher than their more popular U.S counterparts.
The Investigation Is Healthy For The Market: Novogratz
Billionaire investor and crypto proponent Mike Novogratz was welcoming of the probe, describing it as a healthy development for the market. Speaking to Bloomberg by phone, Novogratz concurred with the DOJ, saying that from his own trading experience, he knows that many exchanges are inflating trading volumes just to create excitement among their users. Describing the investigation as long overdue, he believes that it will help weed out the bad actors in the industry, which is ultimately good for its long-term prosperity.
Tyler Winklevoss, the president of the Gemini exchange, shares these sentiments. In an emailed statement, he welcomed the inquiry, saying that it would deter malicious actors and foster the growth of a rules-based marketplace. The Winklevoss twins, who were among the earliest crypto investors, have also taken steps of their own to protect the Gemini exchange from market manipulation. Last month, they announced that they had partnered with Nasdaq, a move which will allow the exchange to monitor for any unusual trading activities using Nasdaq’s SMARTS market surveillance technology. The technology automates the detection and investigation of unusual trading and market behavior and is used by over 140 market participants.
