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In brief: The FBI is known for elaborate sting operations, but its recent takedown of an alleged group of fraudsters working the crypto market was particularly innovative because it created its own token as part of the ruse. This operation marks a significant step in law enforcement efforts to combat criminal behavior in the rapidly evolving cryptocurrency space.
The Federal Bureau of Investigation created its own cryptocurrency token as part of an operation to catch fraudsters in the crypto market. The sting, dubbed Operation Token Mirrors, led to charges against 18 individuals and several companies for widespread fraud and market manipulation.
The FBI's token, NexFundAI, was an Ethereum-based cryptocurrency promoted as an investment vehicle for early-stage AI projects. Unbeknownst to the alleged fraudsters, the FBI created the token to lure and expose those engaged in illegal market practices.
Four crypto firms – Gotbit, CLS Global, MyTrade, and ZM Quant – and 18 individuals now face charges for artificially inflating token prices through fraudulent trades. The defendants allegedly used a practice known as wash trading, where fake trades are executed to create the illusion of high trading activity and demand.
ZM Quant, one of the accused market makers, reportedly accounted for over 80% of NexFundAI's trading volume in May. The firm allegedly advised on how to artificially inflate the token's price, unknowingly participating in the FBI's sting operation.
"This investigation, the first of its kind, identified numerous fraudsters in the cryptocurrency industry. Wash trading has long been outlawed in traditional financial markets, and cryptocurrency is no exception," Acting US Attorney Joshua Levy said.
The operation resulted in the seizure of more than $25 million in cryptocurrency and the deactivation of trading bots responsible for manipulating approximately 60 different cryptocurrencies. Four defendants have already pleaded guilty, with others arrested in Texas, the United Kingdom, and Portugal.
Jodi Cohen, Special Agent in Charge of the FBI's Boston Division, described the operation as "a new twist to old-school financial crime." She said that the FBI's creation of a cryptocurrency token was an unprecedented step in identifying and disrupting fraudulent activities in the crypto space.
The Securities and Exchange Commission has also filed civil complaints against several involved entities for alleged securities law violations. The charges include market manipulation, conspiracy to commit money laundering, and wire fraud, which can lead to sentences of up to 20 years.
Perhaps not surprisingly, the operation has sparked some pushback. A pseudonymous developer known as cygaar claimed that the FBI appeared to have copied several OpenZeppelin libraries without adhering to the MIT License requirements.
– cygaar (@0xCygaar) October 10, 2024Hi @FBI, I noticed that your smart contracts are in direct violation of the MIT License, and thus are subject to copyright infringement.
You clearly copy pasted several of OpenZeppelin's libraries (which use the MIT License), but don't have a license on the code yourself.
The... pic.twitter.com/T4DkGnjshW
Additionally, the FBI may have inadvertently exposed its own wallets used in the operation. Coinbase director Conor Grogan noted that the wallet used to seed NexFundAI distributed capital across several wallets and executed trades, potentially impacting future investigations.
– Conor (@jconorgrogan) October 9, 2024From what I can tell, FBI-linked wallets have recently deposited to Tokenlon, Binance, Zixipay, and HTX.
Here is part of their portfolio if you want to copy trade. The FBI is long ETH pic.twitter.com/gkvesnn5qp
Grogan found that FBI-linked wallets own coins like Pornrocket, EthereumMAX, and BONE.
The FBI is now reaching out to potential victims of NexFundAI and related tokens, setting up a dedicated form for those who may have lost funds.