In an amazing turn of events, FBI developed a fake token to identify several fraudsters among market makers. Obviously, the story is worth an epic Hollywood film. And maybe it will see the light of day once. Anyway, let’s try to dissect the events that led to one of the most scandalous events in the crypto market in 2024, so far.
The Federal Bureau of Investigation (FBI) revealed the specifics of its amazing, first of its kind undercover operation today, October 10, 2024.
The FBI has polished a classic strategy to stop fraud and manipulation of the crypto market.
A judge just unsealed a broad-ranging criminal case brought by the Department of Justice against eighteen individuals and businesses accused of manipulating crypto markets and artificially boosting tokens. The complaint claims that the operation focused on one crypto company with a multi-billion dollar market value and depended on a ruse involving a newly created cryptocurrency spun up by the FBI.
A statement from Jodi Cohen, the special agent in charge of the FBI's Boston office, claims that the Bureau "unprecedentedly stepped" in creating its own cryptocurrency token and a fictitious company to help capture the claimed criminals.
The bureau was able to catch multiple fraudulent market makers thanks to the sting operation that utilized a phony cryptocurrency token.
And while the event might seem an irrelevant to many at first sight - ok, the FBI, fraudsters, let’s flip the channel - it might have a meaningful impact on the general crypto market. How’s so? Let’s find out.
The FBI’s Bold Move with the Fake Token
So, the FBI had serious suspicions about some bad guys, just like in any other typical crime film set in Hollywood. They went ahead and performed a unique procedure. Which, incidentally, encompassed a fairly thorough understanding of how the cryptocurrency market functions. Along with some creativity.
The agents chose to go undercover in order to approach the suspects more closely. And they did it by making their own token. A first ever police crypto token, if you will.
It was an Ethereum-based token called NexFundAI.
What followed? As interest in the token grew, the FBI cultivated connections with four prominent market makers, all of whom were believed to have been involved in various pump-and-dump schemes.
Companies implicated in the dragnet investigation were ZM Quant, MyTrade, CLS Global, and Gotbit, all of which were accused of engaging in sham trades to artificially inflate token prices for kickbacks.
By entangling the suspect in illicit schemes using their fictitious token, the FBI was able to collect the evidence needed to construct the case.
A defendant who identified as the "mastermind" went on to say that his business generated trading volumes on centralized exchanges by using bots to simultaneously buy and sell. He requested $2,000 in advance while confirming a September in-person meeting. The market maker's bots were still engaging in wash trades worth millions of dollars up until last week, when law enforcement requested that they be deactivated.
Market cap for NexFundAI is approximately $237,000, and it is still trading actively, according to DEX Screener, a cryptocurrency price tracker.
The crypto firm Saitama, based in Massachusetts, employed some of the defendants. The company artificially inflated the value of its tokens to $7.5 billion. Saitama collaborated with Gotbit, one of the purported market makers, to boost the token's value artificially. According to the DOJ, Saitama executives made tens of millions of dollars by covertly selling their tokens. A cofounder of Gotbit admitted to CoinDesk in 2019 that the company's practices were "not entirely ethical."
There are a number of defendants who had foreign operations, including those in Russia and Portugal; five of them have either pled guilty or consented to do so. The DOJ indictment was accompanied by civil complaints filed by the Securities and Exchange Commission, which alleged violations of securities law against the market-making operations.
Ultimately, 18 people were apprehended by the FBI, with 4 of them having already entered guilty pleas.
Market Reaction
The notorious behavior of the NexFundAI token undoubtedly caused the loss of funds for many innocent individuals. Since the sting operation concluded, the FBI has been in touch with NexFundAI victims.
In order to help those who have lost money trading these tokens, the agency has created a special form.
Individuals who submit the form may be qualified for a range of benefits, including reparations, services, and protections afforded by state and federal statutes. The peculiar plea to victims is an element of the larger FBI initiative to combat cryptocurrency fraud.
The operation, which uncovered multiple crypto industry fraudsters, was the first of its kind, according to Acting US Attorney Joshua Levy.
“These are cases where an innovative technology – cryptocurrency – met a century-old scheme – the pump and dump. The message today is if you make false statements to trick investors, that’s fraud. Period. Our Office will aggressively pursue fraud, including in the cryptocurrency industry,” he said.
The SEC has lodged civil complaints against Gotbit, CLS, ZM Quant, Saitama, and Robo Inu, according to the FBI. The complaints allege that their actions violate securities laws.
Following the first ever crypto sting operation by the FBI, the crypto community went into a frenzy.
The agency had "rug-pulled" retail investors, according to some users.
Many in the cryptocurrency community, however, applauded the FBI's strategy and warned would-be manipulators that the bureau had finally caught up to them technologically.
Visualizations of the NexFundAI token's transaction history were shared on social media by users, revealing that it was only used by fraudulent firms.
Continuous analysis platform The FBI's cunning seeding of its wallets, deployment of capital to numerous other wallets, and dozens of trades were revealed by bubblemaps.
Although this was an agency first, the operation's approach was distinctly antiquated, involving the use of a traditional "honey trap" to detect criminal activity.
Many in the cryptocurrency community are now asking what additional strategies the FBI may employ to tackle fraud in the industry in light of this stunt.
A lot of people are concerned about the future of the market maker industry as a whole if the FBI and other law enforcement organizations keep up their tough battle against fraud.
Market makers or Fraudsters?
Even though we don't yet have all the information from the current investigation, we can speculate as to why the FBI was looking into well-known market makers and what exactly was wrong with their actions.
The problem is that market making is basically a fraudster business, according to the law enforcement agencies.
There is always the risk of manipulation in the trading industry, whether it's a stock market or a cryptocurrency market. Information, prices, rumors, and other forms of manipulation are the foundation upon which all trading rests. Some of these actions, however, may be considered lawful, while others are completely illegal.
There is a constant risk of manipulation by market makers on cryptocurrency exchanges.
This kind of market manipulation is the most common in the cryptocurrency industry, according to the FBI.
Methods like wash trading, in which users spoof buy and sell orders to make it seem like there is demand, are common ways that token prices are artificially inflated. The current events have a significant impact on other market participants because they are unaware of what is happening. They are enticed to purchase a token that is rapidly increasing in value, hoping to profit from it. Obviously, that won't work out in the end. It is common practice for fraudsters to simply dump the over-pumped token and go on to another target once they feel they have made enough profits.
Offshore exchanges are particularly rife with this practice; according to independent analysts contacted by Fortune magazine, the percentage of inflated trades could reach 50%.
Consider this: experts believe that over 50% of all market making may be fraudulent.
Three market makers and their employees are the subjects of the DOJ's case. Prosecutors claim that they provided wash trading services for a fee.
Even though pump and dumps have been around for a century, the indictment calls this investigation "the first of its kind." Perhaps this indicates that we should anticipate an increase in these types of investigations. The hunt for fraudulent market makers is now underway.