The U.S. Department of Justice (DOJ) has unsealed a wide-ranging criminal case accusing eighteen individuals and companies of manipulating cryptocurrency markets and artificially inflating token prices through illegal practices. The defendants, according to the indictment, targeted a cryptocurrency firm valued at several billion dollars, with their operation aided by a novel ruse orchestrated by the FBI. The government agency developed its own cryptocurrency token to infiltrate and expose the market manipulation.
The case marks a milestone in the federal government’s crackdown on crypto-related crimes and represents the first instance where the DOJ has brought criminal charges against financial services firms for market manipulation in the digital currency sector. The investigation builds upon previous prosecutions involving individuals manipulating crypto platforms, such as the case of Avraham Eisenberg, who was convicted in April for orchestrating a scheme to rig Mango Markets, a decentralized platform.
The most notable aspect of the current case is the FBI’s innovative approach to catching the suspects. In a statement, Jodi Cohen, special agent in charge of the FBI’s Boston office, revealed that the Bureau employed a strategy never before used in such investigations: creating a new cryptocurrency token and setting up a fake company to ensnare the alleged fraudsters.
The FBI’s token, named “NexFundAI,” was designed to operate on the Ethereum blockchain, one of the most widely used networks for cryptocurrencies. The fake company was developed to lure market makers—firms that create liquidity in the market by providing buy and sell orders—who were believed to be involved in illegal wash trading practices. This method of market manipulation involves creating fake buy and sell orders to inflate a token’s trading volume, making it appear more in demand than it truly is.
The DOJ’s case is significant not only because of the methods employed by law enforcement but also because of the magnitude of the fraud. The indictment alleges that the defendants collectively carried out schemes that manipulated the crypto market and contributed to artificially boosting the market capitalization of one token to over $7.5 billion.
Market manipulation in the cryptocurrency industry is rampant, particularly due to the largely unregulated nature of many exchanges, especially those operating offshore. Practices such as wash trading, pump-and-dump schemes, and spoofing (where traders place fake orders to move the market) are unfortunately common. Independent analysts estimate that as much as 50% of cryptocurrency trading volumes are artificially inflated through these practices, creating misleading perceptions of market demand and liquidity.
Wash trading, in particular, is a tactic that involves buying and selling the same asset simultaneously to artificially inflate trading volumes. This practice misleads investors into believing there is higher demand for a token, thus driving up its price. Offshore exchanges, which often face less scrutiny than their U.S.-based counterparts, have become a breeding ground for such illicit activities.
According to the DOJ, the defendants in this case, including three prominent market makers, offered wash trading services for a fee. The indictment describes this as “the first case of its kind,” but federal prosecutors are quick to note that the underlying techniques used by the defendants are reminiscent of age-old pump-and-dump schemes that have been around since the early days of traditional stock markets.
The FBI’s undercover operation involved setting up the cryptocurrency token NexFundAI and approaching market makers with the offer of employing their services. One of the defendants, who described himself as the “mastermind” of the operation, explained that his company used automated bots to conduct wash trades on centralized exchanges. These bots could buy and sell a token at the same time, artificially generating high trading volumes and driving up the token’s price.
The “mastermind” even requested an upfront payment of $2,000 during an in-person meeting in September with the FBI’s undercover team. The FBI’s operation continued for months, during which the market makers allegedly generated millions of dollars in wash trades for NexFundAI. As recently as last week, the bots employed by the market makers were still executing wash trades before being deactivated at the request of law enforcement.
Despite the exposure of the fraudulent operation, NexFundAI remains active in the cryptocurrency market. According to the crypto price tracker DEX Screener, the token currently has a market capitalization of approximately $237,000, although this figure pales in comparison to the artificially inflated values generated by the wash trading operation.
One of the central players in the DOJ’s case is Saitama, a Massachusetts-based cryptocurrency firm accused of orchestrating a significant market manipulation scheme. According to the indictment, Saitama’s executives worked with Gotbit, a notorious market maker, to artificially inflate the value of its token, ultimately reaching a market capitalization of $7.5 billion. This massive valuation was far from reflective of the token’s actual value, which had been inflated through a series of wash trades and other illicit practices.
Gotbit, an offshore firm known for offering market manipulation services, was already on the radar of cryptocurrency observers. In 2019, a cofounder of Gotbit admitted to CoinDesk that his business practices were “not entirely ethical,” though the firm has continued to operate in the years since. According to the DOJ, Saitama executives secretly sold off large portions of their token holdings, making tens of millions of dollars in profits while the manipulated market price remained high.
The extent of Saitama’s fraudulent activities highlights the ease with which companies can inflate token prices in the crypto space, often with little oversight from regulators. Although the Securities and Exchange Commission (SEC) has increasingly scrutinized initial coin offerings (ICOs) and token sales, the rapidly evolving nature of cryptocurrency technology has allowed bad actors to stay one step ahead of enforcement actions—until now.
The international scope of the DOJ’s case adds another layer of complexity. Several of the defendants operated from countries outside the U.S., including Portugal and Russia, complicating the enforcement of U.S. laws. Despite these challenges, federal authorities were able to secure arrests and plea agreements in multiple jurisdictions.
Of the eighteen individuals charged, five have already pleaded guilty or agreed to do so, according to the DOJ. These guilty pleas indicate that some of the defendants are cooperating with authorities, potentially revealing further details about the inner workings of the manipulation schemes. This cooperation could prove vital in the DOJ’s broader efforts to root out market manipulation in the crypto space.
In addition to the criminal charges filed by the DOJ, the Securities and Exchange Commission (SEC) has initiated civil enforcement actions against the individuals and companies involved. The SEC’s complaints focus on violations of securities laws, alleging that the defendants engaged in fraudulent activities related to the trading of unregistered securities, a common issue in the cryptocurrency industry.
The DOJ’s case against these market manipulators marks a pivotal moment for cryptocurrency regulation. While the crypto industry has long been viewed as the “Wild West” of finance, marked by high volatility and limited oversight, the federal government’s aggressive actions signal a shift toward stricter enforcement of financial laws in this space.
The DOJ’s indictment and the FBI’s novel investigative techniques serve as a warning to those engaging in market manipulation and other illegal activities in the crypto world. By creating its own token and company to ensnare wrongdoers, the FBI demonstrated that law enforcement agencies are willing to adopt creative approaches to combat sophisticated financial crimes in the digital age.
Furthermore, this case underscores the need for greater regulatory clarity in the cryptocurrency market. While U.S. regulators like the SEC have made strides in addressing the sale of unregistered securities and fraudulent ICOs, the rapid growth of decentralized finance (DeFi) platforms and offshore exchanges presents new challenges. Without comprehensive regulation, the potential for market manipulation remains high.
As the DOJ and other agencies ramp up their efforts to police the crypto markets, industry participants are likely to face increasing scrutiny. The long-term impact of this case will depend on how effectively regulators can balance the need for innovation with the enforcement of existing financial laws. However, one thing is clear: the era of unchecked market manipulation in the crypto space may be coming to an end.
