The United States Department of Justice is apparently conducting an investigation into suspected price manipulation of bitcoin as well as other cryptocurrencies by traders.
Four sources with access to ongoing Department of Justice investigations, who asked not to be identified, divulged to Bloomberg details of a criminal investigation that is supposedly still in its early stages. The investigation would represent a new level of regulatory prioritization for cryptocurrency oversight in the United States.
According to the sources, federal prosecutors are working in conjunction with the Commodity Futures Trading Commission (CFTC). It is unclear whether that partnership was created to investigate bitcoin financial derivatives, which the CFTC regulates as part of its mandate, and which have recently been suggested as impacting prices across both crypto and stock markets.
What was revealed is that the investigatory probe is focused on illegal market practices, mostly scam methodologies that exist in conventional markets. These include spoofing – the act of tricking innocent investors into buying or selling, based off the creation of fake demand in markets – and wash trading, the act of buying via one broker and selling that purchase through another in order to trick other investors into a buying position and thus illegally influence the market. Both have potentially large impacts. Researchers found that in late 2013, "a single actor likely drove the USD/BTC exchange rate from $150 to $1000 in 2 months," after a suspicious spike in trading activity across almost all exchanges. Thin markets with small numbers of actual traders are particularly vulnerable to price manipulation, and during crises bad actors can swoop in to make off with millions.
For example, during the notorious Mt. Gox attack, the embattled Japanese exchange saw a host of trades that appeared valid, but were actually made by bots that did not actually own the cryptocurrency behind those trades. Fake trades enabled hackers to steal roughly 650,000 bitcoins from Mt. Gox in June 2011.
While the new investigation could encompass a cryptocurrency ecosystem that has grown to house thousands of different tokens, the sources for this story specifically mentioned that prosecutors are examining bitcoin and Ether.
The Securities and Exchange Commission has already taken a related action independently, conducting investigations into initial coin offerings (ICOs). And this week Commissioner Jay Clayton gave his support to Operation Cryptosweep, a coordinated series of investigations by state and provincial regulators in the US and Canada.
Perhaps wary of the possibility of currency manipulation, the Winklevoss twins took action recently, partnering with Nasdaq to use its cutting-edge market surveillance tools to monitor their US-based cryptocurrency exchange, Gemini.
Cryptocurrency markets will indubitably present unique challenges for the Department of Justice and CFTC, as their extreme volatility and the opacity of their provenance could make it harder to discover price manipulation. However, there is apparently at least one market fundamental the federal investigators can bank on. After news of this investigation broke this morning, the price of bitcoin fell roughly 3 percent.