FBI Creates Crypto Token to Target Market Manipulators
The US Federal Bureau of Investigation (FBI) has created its own cryptocurrency token to trap suspects in fraud schemes.
NexFundAI, which operated on the Ethereum blockchain, was created by the bureau to catch illicit market makers and manipulators. The token was presented as an opportunity to invest in early-stage artificial intelligence (AI) projects.
According to the Securities and Exchange Commission (SEC), market maker ZM Quant was hired to support NexFundAI trading. The firm advised NexFundAI's backers how to artificially inflate the token's price before "cashing out at the peaks."
Trades from ZM Quant accounted for more than 80% of NexFundAI's trading volume. Trading for just one day on 31 May, the token generated $4,600 in artificial volume.
“What we uncovered has resulted in charges against the leadership of four cryptocurrency companies, and four crypto ‘market makers’ and their employees who are accused of spearheading a sophisticated trading scheme that allegedly bilked honest investors out of millions of dollars,” said FBI special agent Jodi Cohen.
“The FBI took the unprecedented step of creating its very own cryptocurrency token and company to identify, disrupt and bring these alleged fraudsters to justice.”
On Wednesday, a judge unsealed a criminal case filed by the Department of Justice against eighteen individuals and companies, which are facing charges for “widespread fraud and manipulation” as part of the FBI's sting operation called “Operation Token Mirrors.”
The SEC described the target schemes as "on-demand market manipulation" using algorithms or bots to generate “quadrillions of transactions and billions of dollars of artificial trading volume each day."
One defendant, who met with NexFundAI in person in September, described himself as the "mastermind" and asked for an upfront payment of $2,000.
DEX Screener shows that NexFundAI is still actively trading with a market cap of around $200,000.
Employees of market-makers Gotbit Consulting, CLS Global FZC, and MyTrade MM also face charges, as well as crypto firms Saitama, Robu Inu, VZZN, and Lillian Finance.
Saitama at one point “boasted a market value of $7.5bn” while its leadership “was actively manipulating the market for the Saitama token and secretly selling their tokens for tens of millions in profits,” according to the DOJ. This alleged manipulation was traced back to July 2021 when one Saitama leader proposed a plan to “create an illusion of massive buys and new holders” that would “incite ppl to buy more,” to which another backer replied with a GIF reading “Pump it up.”
“Wash trading has long been outlawed in the financial markets, and cryptocurrency is no exception,” said acting US attorney Joshua Levy, adding, “These are cases where an innovative technology — cryptocurrency — met a century-old scheme — the pump and dump.”