Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
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FBI Sting Uncovers $25M Crypto Market Manipulation
Crypto Sting | Oct 11, 2024
Image: Pixabay/Spectra112
FBI's Fake Crypto Sting Uncovers $25 Million in Market Manipulation
The U.S. Attorney's Office in the District of Massachusetts announced on October 9, 2024 that the FBI has successfully taken down a major market manipulation scheme by creating a fake Ethereum-based token called NexFundAI (NEXF). The undercover FBI sting (known as 'Operation Token Mirrors') led to 18 individuals and businesses being charged for their involvement in a pump-and-dump scam, leading to the uncovering of $25 million in unlawful earnings, which has been confiscated by the U.S. Department of Justice (DOJ). According to the DOJ, this is the first time that financial services companies in the crypto sector have been charged with market manipulation.
See: Ex-FTX Exec Ryan Salame Starts 7.5-Year Jail Sentence
Jodi Cohen, Special Agent in Charge of the FBI’s Boston Division, on the case:
“What the FBI uncovered in this case is essentially a new twist to old-school financial crime. 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.”.
Wash Trading Scam
The pump-and-dump scam used wash trading as their primary strategy to create the appearance of increased trading volume for NexFundAI without the actual market demand. The fake demand was used to influence investor behaviour by artificially inflating prices, and then when the NEXF token reached a certain point, the market manipulators swiftly sold their tokens leaving regular investors in the lurch with significant loses. The case involved popular market makers including ZM Quant, Gotbit, CLS, MyTrade MM, Saitama, and Robo Inu who all provided services to inflate token values on behalf of cryptocurrency companies.
See: TD Bank’s CEO Departs Amid $3B Money Laundering Failure
As part of the investigation, 'Operation Token Mirrors' uncovered a range of tokens with the most prominent token targeted with fraudulent activity called Saitama, which had a market value of $7.5 billion at it's peak. These scams obviously effect individual traders but the entire crypto sector as a whole.
Global Operation with Major Arrests
This was a global sting operation with authorities collaborating across international borders. To bring these people to court, the FBI collaborated extensively with foreign partners, such as the UK's National Crime Agency and Portugal's Policia Judiciaria. Arrests were made in Portugal, the United States, and the United Kingdom with several of the defendants now awaiting trial, and four have already entered guilty pleas.
Joshua Levy, Acting U.S. Attorney stressed investor diligence:
"These charges are a stark reminder of how vigilant online investors must be... People considering making investments in the cryptocurrency industry should understand how these scams work so that they can protect themselves.”.
See: Regulatory Updates for Crypto Asset Trading Platforms
Conclusion
Operation Token Mirrors clearly demonstrates the increasingly sophisticated tools that the FBI and law enforcement agencies are using to combat fraud in digital times. Seizing $25 million and making multiple high profile arrests sends a strong message to both bad actors and investors.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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