The FBI created its own cryptocurrency so it could watch suspected fraudsters use it – an idea that worked so well it produced arrests in three countries.
News of the Feds' currency, an Ethereum-based instrument named NexFundAI, appeared in a Wednesday Department of Justice announcement that eighteen individuals have been charged "for widespread fraud and manipulation in the cryptocurrency markets."
The Feds allege some of the fraud involved "wash trades" – transactions conducted solely to increase the volume of trades in a security or other asset. Rising volumes of trades are often seen as an indicator that a stock is of increasing interest as it has good growth prospects – a signal that can see prices rise. But wash trades are often conducted by related entities, or even the same entity, to create a false market signal – an arrangement also known as "pump and dump."
Or, as the US Securities and Exchange Commission put it, the alleged schemes are "intended to induce investor victims to purchase the crypto assets by creating the false appearance of an active trading market for them."
Whatever you call this behavior, those behind it hope it will see an asset's price rise beyond what they paid for it. They then sell their own holdings for a profit.
One of the orgs in this case, called Saitama, created its own tokens. Company leadership "allegedly made a variety of false public statements, including that Saitama's business plan had been reviewed by regulators, that its leadership was not selling the Saitama tokens they owned, and that the Saitama token was coded in a way that prevented market manipulation."
But charging documents alleged that "in reality Saitama's leadership was actively manipulating the market for the Saitama token and secretly selling their Saitama tokens for tens of millions in profits."
That concept – a paper corporation that creates and promotes its own cryptocurrency – was adopted by the FBI, which created a company and coin named NexFundAI.
The DoJ alleges the accused conspired to wash trade on behalf of NexFundAI – but of course the Feds were in a privileged position to watch everything.
"The FBI took the unprecedented step of creating its very own cryptocurrency token and company to identify, disrupt, and bring these alleged fraudsters to justice," said Jodi Cohen, special agent in charge of FBI's Boston Division.
"What the FBI uncovered in this case is essentially a new twist to old-school financial crime," he added.
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And because they're old-school crimes, the US Securities and Exchange Commission has announced charges against five "crypto asset promoters."
"Today's enforcement actions demonstrate, once more, that retail investors are being victimized by fraudulent activity by institutional actors in the markets for crypto assets," explained Sanjay Wadhwa, deputy director of the SEC's Division of Enforcement. "With purported promoters and self-anointed market makers teaming up to target the investing public with false promises of profits in the crypto markets, investors should be mindful that the deck may be stacked against them."
Arrests of those allegedly involved in these schemes were made in the UK, Portugal, and Texas this week. Four defendants have already plead guilty, and another intends to. ®