Since it’s conception, Bitcoin and other E-currencies (or cryptocurrencies) have always gained attention from law enforcement. The anonymity of cryptocurrency has allowed for potential criminal exchanges to go undetected.
Though recently, cryptocurrencies have caught the eyes of DOJ for another reason; market price manipulation.
The lack of regulation on most free market e-currencies has caused the DOJ to investigate potential illegal trading tactics in Bitcoin and Etheruem markets. The Commodity Futures Trading Commission, which regulates derivatives related to Bitcoin, is looking into possible trade collusion, spoofing and wash trading. Explanations of these terms follow.
“Spoofing” is putting in a buy order to create false optimism or artificial demand. The idea behind spoofing is to draw in investors to inflate the price to then sell later on; leaving the late investors with an overpriced security, stock, or in this case, cryptocurrency.
Similarly, “wash trading” is the same investor making many trades; both buying and selling, to create artificial activity. The idea is to increase trading volume which seemingly gives more demand to the underlying asset.
Regulators have tried to root out these trading techniques on traditional markets like wall street. Though Bitcoin’s anonymity has made it trickier for regulators to spot illegal activity. Early investors know market manipulation is not a new trend in cryptocurrency markets. Cryptocurrencies have often been victim to artificial inflation. Commonly referred to as a “pump and dump”, many investors will wait for this artificial inflation to peak, then sell. This leaves late adopters with nothing but false promises of getting rich. Though many investors fear impending regulation on cryptocurrencies, some are looking at this crackdown as a step in the right direction.
With the recent Bitconnect scandal (or rather scandals), this increase in regulation might actually help deter fraud in cryptocurrency marketplace. The Winklevoss twins, owners of the cryptocurrency exchange Gemini Trust Co., were a step ahead of regulators by hiring Nasdaq Inc. last month to monitor potential illegal trading tactics on their exchange. Also, the Winklevoss twins urged other exchanges to follow in their footsteps to self-regulate their own industry. The last few months in the cryptocurrency marketplace have been a bumpy or “pumpy and dumpy” road. Though, these are potholes the government seems to actually care about and are trying to fill as cryptocurrencies continue to grow in technological importance and fiscal power.