The United States Department of Justice has launched a probe into claims of market manipulation across bitcoin and other cryptocurrency markets. The investigation is in collaboration with the Commodities and Futures Trading Commission, which oversees derivatives of bitcoin and other coins.
The investigation is aimed at manipulation techniques including ‘spoofing’ and ‘wash-trading’. Spoofing is a practice where traders place fake large volume orders on exchanges in an attempt to lure inexperienced investors into buying or selling, only to remove the order before it ever completes. Wash-trading involves a trader, or even a group of traders, trading back and forth with themselves to create an illusion of more market activity than what actually exists.
These behaviors allow ‘market makers’ to push the price of an asset in their desired direction, often resulting in substantial profit. Such market manipulation is illegal in traditional markets, and the activities put a spotlight on why regulation is so necessary for the budding cryptocurrency market that’s full of inexperienced traders.
Cryptocurrency, given its semi-anonymous design, its unregulated global market, and the overall lack of anti-money-laundering and know-your-customer enforcement at exchanges around the globe, makes it a market rife with manipulation and other fraudulent activity.
Financial regulators from key countries such as China, Japan, South Korea, Europe, and the US have been actively increasing efforts to establish guidelines for exchanges, but due to the complexity of the new asset class, there’s not a one-size-fits-all solution. Instead, officials at top exchanges such as Gemini’s Cameron and Tyler Winklevoss, believe that exchanges should band together to self-regulate.
Bitcoin’s price dropped to a May low of $7300 as a result of the news.