On Wednesday, a judge unsealed a wide-ranging criminal case brought by the Department of Justice against eighteen individuals and companies accused of manipulating crypto markets and artificially boosting tokens. According to the complaint, the operation targeted one crypto firm with a multi-billion-dollar market value, and relied on a ruse involving a new cryptocurrency spun up by the FBI.
The indictment is the first criminal prosecution by the DOJ against financial services firms for crypto market manipulation, after previously charging an individual, Avraham Eisenberg, who was convicted in April for rigging a platform called Mango Markets.
The most notable feature of the case, though, was the methods employed by the Federal Bureau of Investigations to nab the defendants. According to a statement from Jodi Cohen, the special agent in charge of the FBI's Boston office, the Bureau took the "unprecedented step" of creating its own cryptocurrency token and a fake company to help ensnare the alleged crooks.
A century-old scheme
The crypto industry is no stranger to market manipulation, where token prices are often artificially influenced through practices such as wash trading, where participants fake buy and sell orders to create the appearance of demand. The practice is especially prevalent among offshore exchanges, with independent analysts estimating that as much as 50%—or more—of trading is inflated.
The DOJ's case targets three market makers and their employees, which prosecutors allege offered wash trading services in exchange for payment. The indictment describes the investigation as "the first of its kind," though prosecutors note that pump and dumps are a "century-old scheme."
To uncover the operations, the FBI created a token called NexFundAI that operated on the Ethereum blockchain, eventually meeting with the market makers to discuss employing their services. One of the defendants described himself as the "mastermind," explaining that his company used bots to buy and sell at the same time on centralized exchanges to generate trading volumes. While agreeing to an in-person meeting in September, he asked for an upfront payment of $2,000. As late as last week, the market maker's bots were still making millions of dollars worth of wash trades before being deactivated at the request of law enforcement.
According to the crypto price tracker DEX Screener, a token launched on Oct. 9 called NexFundAI was still trading actively with a market cap of around $237,000 at the time of publication.
Several of the defendants worked at Saitama, a Massachusetts-incorporated crypto firm that manipulated its token price to create a market value of $7.5 billion. Saitama worked with one of the alleged market makers, Gotbit, to artificially inflate the value of its token. The DOJ alleges that Saitama executives were secretly selling their tokens for tens of millions in profits. In 2019, a Gotbit cofounder told CoinDesk that his business was "not entirely ethical."
Several of the defendants operated internationally, including in Portugal and Russia, and five have already pleaded guilty or agreed to plead guilty. Along with the DOJ indictment, the Securities and Exchange Commission also filed civil complaints alleging securities law violations against the market-making operations.
Update 10/10/24: Include more details on the NexFundAI token trading volume.
