United States Department of Justice Kicks Off Bitcoin Price Manipulation Probe, Details Remain Murky

Market manipulation, the act of deliberate interference in any type of free or fair market, has been going on exactly as long as markets have existed. The practice is so widespread that even its myriad sub-types have cool monikers such as spoofing, wash trading, the lure and squeeze, quote stuffing, stock bashing, and of course, the pump and dump. Bad actors have recognized a golden opportunity to apply some of these tactics to crypto trading, and government watchdogs like the United States Department of Justice are finally turning a watchful eye.

According to a Bloomberg report released yesterday, the Justice Department opened a criminal probe to determine the extent to which cryptocurrency prices are subject to price manipulation. Because the review is private, details are mostly under wraps at this time, but we do know the DoJ is working with the CFTC (Commodity Futures Trading Commission), a financial regulator who has overseen Bitcoin derivatives trading since it went live in the US in December 2017. This team-up makes sense given the CFTC’s newfound transparency into cryptocurrency trading practices which have traditionally been opaque.

The nature of cryptocurrency presents a fertile ground for bad actors. Prices vary greatly across exchanges worldwide — exchanges generating huge revenue numbers and increasingly being accused of insufficiently investigating illicit practices. There is no governing body tasked with proactive oversight, and, for folks who either witness or fall victim to schemes, nowhere meaningful to report bad behavior. Given the swings endemic to crypto pricing, spotting a scheme versus a natural phenomenon is more difficult than with a traditional equity market.

Some countries like China have banned cryptocurrency exchanges altogether while others like Japan and the Philippines opt instead to regulate in an official capacity. The US has been fairly cautious in this arena, consistent with a Republican administration striving to repeal more regulation than it introduces. But just as we wrote here recently, the more Main Street money appears to be flooding into crypto, the more the federal government feels compelled to save mom-and-pop investors from themselves. What the DoJ and CFTC will actually be able to achieve remains to be seen, particularly given the limited scope of their authority amidst the vast canvas of worldwide crypto trading.

But folks like billionaire investor and crypto celebrity Mike Novogratz are optimistic about the result such a probe will ultimately have on the market’s long-term prospects:

“Weeding out the bad actors is a good thing, not a bad thing for the health of the market,” Novogratz said. “Plenty of exchanges have these inflated volume numbers to create some sense of excitement around coins.”

Novogratz joins the Winklevoss twins in high-profile crypto advocates who support the formation of a fair play, rules-based market. Gemini, the US cryptocurrency exchange the Winklevoss twins founded in 2014, recently struck a deal with NASDAQ to use its surveillance tech to that end. The intrepid and the tech-savvy have already jumped onto the crypto trading bandwagon, and for the market to continue to grow meaningfully in the years ahead, its participants will need to come from elsewhere. A solid mechanism of fraud protection/prevention could be the shot in the arm crypto needs to introduce new players and escape its 2018 doldrums.


Disclosure: This post, as with all Crypto Economist branded posts, is a personal opinion written for informational purposes only. This post does not constitute investment advice, legal advice, tax advice, or any other sort of advice. Likewise, the information herein should not be interpreted as any endorsement, recommendation, or sponsorship of any particular company, token, or security.