Justice Department and CFTC to Probe Crypto Price Manipulation
The U.S. Justice Department has begun a criminal probe into allegations of manipulation by traders of bitcoin and other cryptocurrencies. The investigation is said to be working with the CFTC, the regulators behind futures and derivatives trading in the U.S., and will focus on the illegal practices of spoofing (where fake orders are lodged to influence price direction) and wash trading, a practice where market makers buy and sell to themselves in order to imitate volume and demand.
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The move comes after bitcoin experienced a steep decline from a peak of $20,000 in December of 2017, down to sub $6,000 in February.
Detractors of bitcoin and cryptocurrencies have long gloated about the prospect of intervention by authorities into a marketplace colloquially known as the ‘Wild West’. Famed gold bug Jim Richards once said that bitcoin was “a magnet for all the manipulators who probably were, you know, The Wolf of Wall Street, you know, 20 years ago”.
Prices May Be Subject to Manipulation
Bitcoin and other cryptocurrencies are largely unregulated, and even championed for being so. However the majority of on-ramps already are, meaning fiat has been taxed by the government before hitting exchanges to be swapped for crypto. The long held suspicions were that cryptocurrency markets were conduits for the laundering of illicitly gained money and that illegal trading activities such as spoofing were not only going unchecked, but were coordinated.
This is what a Bitcoin traders' graveyard looks like. This is what happens when stop-hunting bots have access to the exchange's stop order books.
Only wash trading bots are left now, creating an appearance of activity.
DON'T TRADE ON UNREGULATED EXCHANGES, YOU'LL GET SCREWED. pic.twitter.com/okfmlt5Lz4
— Trolly McTrollface (@Tr0llyTr0llFace) April 24, 2018
While threats of regulation have been commonplace for years in the bitcoin industry, especially in China, the United States has been surprisingly relaxed, with the introduction of the much maligned Bitlicense by the NYFDS being a notable, disastrous, exception.
2013 – China bans Bitcoin
2014 – China bans Bitcoin again
2015 – China bans Bitcoin
2016 – …
2017 – China bans Ethereum
— LIL' CO฿AIN (@CryptoCobain) September 5, 2017
Over the last few years however, regulations have started to change the shape of the industry. Most cryptocurrency exchanges exist outside the sphere of influence of the Justice Department and the CFTC, however other illegal activities, like drug dealing, can still fall under the U.S. umbrella.
After a quiet period, since 2016 there has been a steady removal of so called “bad actors” from the space. Starting with the closure of anonymous Russian exchange BTC-e, and the continuing banking issues surrounding other exchanges such as Bitfinex, on-ramps for U.S. dollars have been whittled down to exchanges that conduct KYC and AML checks.
Many believe that the U.S. has conducted this slow burn approach in order to bring existing financial heavyweights into the space, pushing out the smaller players and bringing in the big guns. The accompanying narrative to these moves has is a familiar one — protecting Main Street investors from criminals and charlatans in an unregulated industry. The term being used on crypto Twitter, referring to this is #coinfiscation.
— Kazonomics (@kazonomics) March 8, 2018
So, while Coinbase remains the unicorn in terms of valuation and market share in the U.S., Poloniex has been bought by Circle, a Goldman Sachs-backed financial company. The company has changed some of its terms and conditions and is planning to introduce a US dollar substitute to facilitate crypto trading. Bitfinex, an exchange which had its issues with U.S. dollar onramps and FUD surrounding the use of tether (the cryptocurrency designed to skirt USD difficulties), must be shaking its head in wonder at the Poloniex news.
The initial reaction to the claims of manipulation has seen the price continue its recent downtrend. However, ironically, a 2,000 coin dump occurred just minutes before the publication of an article by Bloomberg.
2000 coins sold at market 15 minutes before Bloomberg published article "U.S. Justice Department opens criminal probe into whether traders are manipulating the price of Bitcoin"
Published at 4AM EST, just in time to be viral for the US open.
I love me a good conspiracy pic.twitter.com/lFNfdDwP01
— lowstrife (@lowstrife) May 24, 2018
Some are thinking that the possibility of a Justice Department crackdown on price manipulation is actually long term bullish:
In a odd way, this is bullish for #bitcoin. No spoofing of limit orders (illegal in the greater market) helps prevent the market being pushed around without skin in the game. Sign of market maturity. Good luck with global enforcement though!https://t.co/wJqPueh1fc
— MrJozza (@MrJozza) May 24, 2018
In the end, this seems like an occurrence that was inevitable. But while the ethos of cryptocurrency has always been to operate outside of the current system, the long arm of the law was always going to make inroads. The issue then becomes: in the quest for financial sovereignty, is it better to have a body to protect you or the ability to decide for yourself?
Do you believe additional regulation is ultimately healthy for the crypto industry? Let’s hear your thoughts.
Images via CFTC, Pixabay