Crypto News: The FBI made a crypto token

Ryan Weeks takes a look at how the alleged market manipulation the FBI found was hiding in plain sight.

You never know who you might be dealing with in crypto. That engineer you hired could turn out to be a North Korean hacker. And your latest client? It just might be the FBI in disguise.

Federal prosecutors dreamed up a company and token named NexFundAI to ensnare 15 digital-asset promoters and traders in an operation announced yesterday. The sting resulted in wash trading charges against representatives of market makers including ZM Quant, CLS Global and MyTrade. Gotbit and its executives face similar charges.

Those companies are accused of "executing sham trades" to "create the appearance of trading activity that would make the tokens look like good investments," according to the statement.

It seems like an especially elaborate ruse given how unashamedly some operators in the crypto space advertise services designed to boost the trading volume or even the price of a given token.

Lower tier market makers "openly offer wash trading services to token foundations," said Matt Batsinelas, founder of Glass Markets, a digital assets monitoring platform.

Source: @NickPullmanEsq

CLS quite literally boasts on its website that clients have seen "average organic volume" triple. Multiple reports over the past year or so suggest DWF Labs, a prominent crypto market maker, has in the past engaged in wash trading — a claim DWF Labs itself denies. ZM Quant, CLS and DWF Labs didn't respond to requests for comment. MyTrade could not be reached for comment via Telegram.

All this adds up to a significant chunk of the sector's total trading volumes. A Solidus Labs report published last year suggests that in the three years from September 2020, liquidity providers carried out at least $2 billion of wash trading on Ethereum-based decentralized exchanges, manipulating the prices of more than 20,000 tokens.

"One sad reality of the space today is that, despite such significant advancement across most verticals, market manipulation continues to be all too common," said Rich Rosenblum, co-CEO of the market making firm GSR Markets.

It seems strange, then, that the feds had go to the trouble of inventing NexFundAI to bring yesterday's charges. But you have to hand it to the authorities: They know how to shake things up.

18 months

The length of the prison sentence requested by prosecutors for Heather Morgan, aka the Razzlekhan, after she provided "substantial assistance" in the US investigation of the theft of crypto from Bitfinex in 2016.

"Obviously, falsely accusing someone of having tens of billions of dollars puts them at risk from robbery and kid nappings."

Peter Todd

Software developer

Reacting to a new HBO documentary that suggests he is Satoshi Nakamoto, inventor of Bitcoin, which he denies.

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