According to a report by Bloomberg, the Department of Justice has opened a criminal investigation into the alleged price manipulation by the cryptocurrencies’ traders.
The investigation is primarily focused on the illegal practices to influence currency prices.For example, flooding the market with fake orders to get the traders trick into buying or selling. The Federal prosecutors are working with the Commodity Futures Trading Commission (CFTC) the fundamental regulatory body to oversee derivatives tied with the digital coins.
The government body believes that virtual currencies are vulnerable to fraud for various reasons. Cynicism over the way crypto exchanges operate, price volatility, and absence of clear regulations are some of the biggest concerns, forcing them to rein in and take a deep look.
While some of these cheating techniques have been here (in the financial markets) for quite long, the regulators were able to curb those with the help of clearly defined regulations. The problem with the current episode is the lack of clear regulations to monitor and prevent frauds.
As we covered in previous posts, these concerns are not restricted to one market or regulator but shared by regulators all over the world. From China to South Korea, Japan to Philippines, almost every big market has been a victim of scams and unhealthy practices. As a result, regulators were forced to take extreme measures – like ban in China and South Korea.
The Bloomberg report mentions that federal investigators are specifically looking into the practices like spoofing and wash trading. Spoofing is filling the market with fake orders that are canceled (later), manipulating others to make prompt buying or selling decisions.
Wash trading is a type of trading where a person does business with own self just to create an illusion of bigger (fake) market demand. While these types of practices are not new, scammers tend to use them (successfully) in the crypto market, apparently due to lack of transparent regulations.
It is pertinent to note that the latest investigations are not the first attempt by the United States government to rein in the shady practices. Securities and Exchange Commission (SEC) has been trying for months to better understand and regulate the token sales.
In fact, it has also created a fake ICO just to make the market understand the good and bad practices, and avoid scammers. However, as long as there are no defined rules, the problem is set to stay here and mere a couple of investigations may not end it permanently.