Written by: Liu Honglin, Attorney at Mankiw LLP
There have been a lot of jokes about the cryptocurrency industry in the United States recently. In addition to Trump's call for all Bitcoin to be produced in the United States, other parts of the U.S. government are also paying special attention to the cryptocurrency industry.
Recently, the U.S. Department of Justice and the FBI have launched an unprecedented law enforcement action against the virtual currency industry, targeting not ordinary cryptocurrency users, but the "operators" hiding behind the scenes - virtual currency market makers.
Cryptocurrency market makers
The role played by market makers in the cryptocurrency market is similar to that of liquidity providers in traditional finance. They maintain market trading activity by buying and selling tokens on exchanges, ensuring that investors can trade at reasonable prices. Typically, market makers make profits in the following ways.
Fabricating trading volume: One of the most common services market makers provide is to create fake trading volume through “wash trades.” They use robots to buy and sell on centralized exchanges to artificially increase the trading volume of a token. This behavior not only misleads other investors into thinking that the market is very active, but also helps project owners circumvent the listing thresholds of some exchanges. Some exchanges set trading volume thresholds, and only active tokens can be exempted from listing fees or receive more promotional resources. Market makers help project owners reach these thresholds by creating fake trading volume, thereby avoiding high listing fees. This is also part of their profit source.
Maintaining market price stability: Market makers usually play the role of a "balancer" in the market. They keep the price of tokens relatively stable by placing buy and sell orders at the same time to prevent drastic price fluctuations. The fees for this service are usually calculated on a monthly basis, and the project party will pay a high fee to ensure that the market price remains within the range desired by the project party. However, market makers may also make profits by manipulating prices, such as buying a large amount of tokens when the price is low, and then selling them after raising the price.
Pump and Dump: This is one of the most typical means of market manipulation. Market makers will work with project owners to first raise the price of tokens through large-scale buy orders, and then attract more investors to follow suit and buy through false information or market enthusiasm. When the price is raised to a certain level, market makers and project owners will quickly sell tokens and make a lot of money, while those investors who enter the market last will become the "buyers" of the price collapse.
It seems to be a basic operation in the cryptocurrency industry, but in this law enforcement incident, four market makers, Gotbit, ZM Quant, CLS Global, MyTrade, and 14 individuals were formally prosecuted for suspected market manipulation and false transactions. The reason is that these market makers used robots to buy and sell on exchanges, creating false market trading volumes, artificially raising the price and trading volume of tokens, and causing investors to suffer losses.
This action can be regarded as a milestone in the history of American justice - for the first time, cryptocurrency market makers have been targeted, and the United States has once again stepped up its regulatory enforcement of the cryptocurrency market.
Phishing operation: FBI issues coins to arrest people
Throughout the entire incident, what surprised Attorney Honglin the most and felt was the phishing enforcement strategy used by the FBI this time.
In order to catch the market makers who manipulated transactions in the cryptocurrency market, the FBI did not take the traditional investigation method, but decided to role-play and personally participate. They invested a lot of money, not only set up a fictitious cryptocurrency company, but also specially designed and issued a product called "NexFundAI".
On the surface, this fictitious company and token are extremely simulated, with complete blockchain records, business plans, and related technical team backgrounds, and appear to be a legitimate cryptocurrency project.
The FBI carefully arranged several rounds of "market operations" to package the project and lured market makers in the market through "business talks". In several meetings, FBI undercover agents even put forward specific market operation requirements - they required market makers to use robot programs to help "NexFundAI" conduct wash sales and inflate the trading volume of tokens to attract more investors.
Through continuous online meetings, email exchanges, and actual market operations, the FBI gradually obtained detailed evidence of market makers' involvement in fake transactions. Market makers not only helped the FBI complete fake transactions, but also discussed with FBI agents how to more effectively circumvent market supervision, how to hide traces of wash sales through multiple account operations, and even how to further increase token prices in the market so that both parties can gain more benefits.
All evidence was fully recorded. Finally, the FBI decided to close the net, and with the cooperation of Portugal, the United Kingdom, the United States and other countries and regions, senior executives and related employees of companies such as Gotbit and ZM Quant were arrested in one fell swoop. According to media reports, four defendants have pleaded guilty, another defendant agreed to plead guilty, and three other defendants were arrested this week in Texas, the United Kingdom and Portugal. More than $25 million in cryptocurrency has been seized, and multiple trading robots responsible for millions of dollars of "wash trading" in about 60 cryptocurrencies have been shut down.
In addition, in this law enforcement action, the FBI is not the only main force in this action. The SEC (U.S. Securities and Exchange Commission) also actively participated in the entire action, especially in the civil field, where it filed multiple lawsuits against these market makers. The core issues that Gotbit, ZM Quant and other companies were accused of were market manipulation and false trading.
According to current U.S. law, market manipulation and false trading are serious financial crimes, especially in cases involving securities laws. Market makers manipulate market prices through false transactions and deceive investors to obtain illegal profits. This behavior is considered market manipulation within the legal framework of the U.S. Securities and Exchange Commission (SEC). Once confirmed, it can be sentenced to up to 20 years in prison and a fine of up to $5 million or twice the proceeds of the crime. Market makers use electronic communication equipment (such as telephones and the Internet) to implement market manipulation and fraud, suspected of violating the wire fraud law. This is a serious federal crime, with a maximum sentence of 20 years in prison and a fine of up to $250,000. In addition, if convicted, the relevant persons may also face high compensation and confiscation of illegal gains. In addition, some market makers try to hide illegal gains through complex transaction structures and capital flows in the process of market manipulation, which will trigger charges of money laundering. Money laundering is also a serious federal crime, with a maximum sentence of 20 years in prison and a possible fine of up to $500,000 or twice the value of the illegally obtained property.
American style is not always white moonlight
The FBI's sting operation, while exposing the gray operations in the virtual currency market, can also make everyone rethink the so-called American rule of law.
As a country that claims to be a "rule of law country", this approach obviously challenges people's understanding of the rule of law and justice to some extent. For the cryptocurrency industry, the US government is no longer just passively regulating, but will intervene in the market in a more active way, and even use fictitious projects to entrap. Although from the perspective of combating crime, fishing enforcement as a special law enforcement method can effectively combat illegal activities in the market, the scale and boundaries of the operation in the process make industry participants more worried about whether they will be "accidentally injured".
The future cryptocurrency market will be more complicated, and we need to guard against not only peers and market makers, but also governments under the banner of regulation and law enforcement.
