The United States Department of Justice has opened a criminal investigation into possible fraudulent trading practices being employed in digital currency markets. According to a report by Bloomberg that cites individuals close to the matter, the Justice Department has teamed up with the Commodity Futures Trading Commission (CFTC) to investigate potential cryptocurrency price manipulation, with a specific focus on the Bitcoin markets.
As referenced in the report, the illegal practices of interest include ‘spoofing’, which is a method of flooding the markets with fake orders to trick others into buying or selling. Spoofing was originally made illegal under the Dodd-Frank Act in 2010 but only applies to regulated markets, leaving the cryptocurrency markets largely susceptible. There is no indication of the impact these practices have on the currently regulated Bitcoin futures markets, which recently saw the highest single-day trading volume in its short history.
In a follow-up interview shortly after the report broke, Billionaire investor Mike Novogratz, who’s launching a cryptocurrency exchange of his own, emphasized the importance of the US government taking action.
“Weeding out the bad actors is a good thing, not a bad thing for the health of the market. Plenty of exchanges have these inflated volume numbers to create some sense of excitement around coins.”
To get ahead of the impending regulatory crackdown, major crypto exchanges including Coinbase and Gemini have worked to build their platforms towards full compliance. Just last week, a report broke that Coinbase had met with U.S. regulators to explore obtaining banking licenses earlier this year. Obtaining these licenses would allow Coinbase to bypass the need for third-party banking partners, establishing the company as a fully regulated financial institution.
Gemini has also been working closely with regulators for some time and it was recently announced that the company it hired the Nasdaq last month to conduct surveillance of digital coins trading on their exchange and is exploring a potential collaboration to build out a new exchange.
How the outcome of this investigation will affect existing exchanges or even the multitude of large financial institutions building dedicated trading desks is currently unknown. However, improving the watchdog system for this highly volatile investment class should ultimately work to reduce the amount of fraud that plagues the industry.