The US Justice Department is reported to have opened a criminal probe into whether traders are manipulating the price of Bitcoin and other cryptocurrencies, dramatically ratcheting up US scrutiny of digital currency markets that critics say are rife with misconduct.
The investigation is focused on illegal practices that can influence prices — such as spoofing, or flooding the market with fake orders to trick other traders into buying or selling, said people familiar with the investigation, who asked not to be identified because the review is private. Federal prosecutors are working with the Commodity Futures Trading Commission, a financial regulator that oversees derivatives tied to Bitcoin, according to Bloomberg.
Authorities worry that virtual currencies are susceptible to fraud for multiple reasons: skepticism that all exchanges are actively pursuing cheaters, wild price swings that could make it easy to push valuations around and a lack of regulations like the ones that govern stocks and other assets.
Bitcoin extended its Thursday declines and was down 3% to $7,409. It’s down more than 20% since a May 4 peak.
Such concerns have prompted China to ban cryptocurrency exchanges and nations including Japan and the Philippines to regulate them, contributing to a slump that has sent Bitcoin below $8,000 this year. Still, digital coins continue to be a global investment craze, drawing legions of loyalists to industry conferences, generating celebrity endorsements and increasingly attracting the attention of Wall Street.
The illicit tactics that the Justice Department is looking into include spoofing and wash trading (Market Rigging) — forms of cheating that regulators have spent years trying to root out of futures and equities markets, the people said. In spoofing, a trader submits a spate of orders and then cancels them once prices move in a desired direction. Wash trades involve a cheater trading with herself to give a false impression of market demand that lures other to dive in too. Coins prosecutors are examining, include Bitcoin and Ether.
A Justice Department spokesman declined to comment and CFTC officials didn’t respond to requests for comment.
The investigation, which the people said is in its early stages, is the US’s latest effort to crack down on an industry that was initially embraced by those who were distrustful of banks and government control over monetary policy.