Traders may be manipulating the price of digital currencies, including bitcoin.
Bloomberg reported that the Justice Department has launched a criminal probe to determine whether traders are engaging in illegal practices, such as spoofing and wash trading.
In spoofing, cheaters flood the market with fake orders to trick other traders into believing values are greater or lesser than they really are. This can lead to misinformed buying or selling, artificially influencing prices. Once the desired result is achieved, the cheater cancels his orders.
In wash trading, cheaters will trade with themselves to create the impression of market demand, enticing other traders to get in on the action.
Federal prosecutors and the Commodity Futures Trading Commission, a financial regulator responsible for overseeing bitcoin derivatives, are working to dig up the truth. Both bitcoin and Ether are now under the microscope, according to insiders cited by Bloomberg.
Critics have long said the red-hot cryptocurrency markets are rife with misconduct, and it turns out they may have been right. These currencies can be susceptible to fraud for a few reasons.
First, many traders are skeptical that all exchanges are actively pursuing cheaters, making them more likely to try to get away with something. Then, the wild price swings inherent in the market make it easy to mask artificial price manipulations.
Finally, unlike stocks and other assets, there are not yet regulations in place to govern these platforms and currencies. Experts say the lack of oversight makes cryptocurrency an attractive target for crooks, and once they set their sights on it, spoofing the market is not difficult to get away with.
Japan and the Philippines have moved to regulate cryptocurrencies due to such concerns, while China opted to outright ban them. Could the current federal investigation prompt similar action in the U.S.? It’s certainly possible, and it wouldn’t be the country’s first effort to crack down on the industry, which regulators say is attracting investors who don’t know or understand the risks.