A reported new US Department of Justice (DoJ) probe into market manipulation at cryptocurrency exchanges has teeth, says one lawyer specialising in the regulation of new financial technologies.
On May 24 Bloomberg said that the DoJ had opened an investigation into illicit trading in bitcoin and other cryptocurrencies. Trading in cryptocurrencies soared in 2017, with the aggregate market value of cryptocurrency tokens increasing over 34 times during the year.
Citing four anonymous sources, Bloomberg wrote that the investigators were looking into types of market manipulation that include ‘spoofing’ and ‘wash trading’. The investigation covers a number of cryptocurrencies, including bitcoin and ether, the largest two cryptocurrencies by market value, said the news service, citing its sources.
Spoofing involves the creation by a manipulator of fictitious trades that are cancelled once a market moves in the desired direction. Trades undertaken to ‘wash’ or ‘paint’ the tape are those conducted by a trader with him or herself to create a false impression of market demand.
According to Richard Levin, Colorado-based chair of the fintech and regulation practice at law firm Polsinelli, cryptocurrency exchange operators and traders should pay close attention to what US federal investigators are doing.
“Remember the lyrics of the Clash song, ‘I fought the law and the law won’.”
“This is a shot across the bows of those involved in market manipulation. Regulators have a history of taking legal actions for this: there was a market maker manipulation scandal in US equity markets in the 1990s, and one called ‘Dr Evil’ involving European government bonds in the 2000s,” Levin told New Money Review.
Those involved in the cryptocurrency market should also not underestimate the US government’s jurisdictional reach, said Levin.
“While US regulators have the ability to take action against anyone conducting business in the US, it’s also instructive to look at the SEC’s DAO investigation report from last July,” said Levin.
“They said they didn’t take any enforcement action because the funds had been returned to investors. They didn’t say they couldn’t take action because the gentlemen concerned were based in Germany or Switzerland.”
“If US regulators and law enforcement want to take action against a foreign national residing overseas they will use their treaty authority and agreements with foreign governments to do.”
Those running cryptocurrency exchanges and trading platforms may wish to beef up their internal infrastructure to handle increased scrutiny, Levin said.
“I’d encourage cryptocurrency market operators, whether they are facilitating transactions in currencies that may not be securities, or in tokens that could be deemed securities, to put in place surveillance programmes and to look for behaviour that could be indicative of market manipulation, fraud or wash trades. A proactive compliance programme will go a long way towards helping promote the growth of this industry,” he said.
Levin cautioned cryptocurrency firms that they shouldn’t assume their software skills will keep them out of trouble.
“It’s a gross miscalculation for market operators to assume they can get one past the government. They should remember the lyrics of the Clash song, ‘I fought the law and the law won’.”
“Some people in cryptocurrency are a bit arrogant about the capabilities of the technology and may underestimate the capabilities of various governments.”
However, Levin said, the fact that regulators are paying closer attention to cryptocurrencies may also be a positive sign.
“It’s another sign of the evolution and maturation of the cryptocurrency space that the regulators are paying attention to it. They are trying to promote innovation but they are also saying they will not stand idly by while some people take advantage of the less-informed.”