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Crypto currency and fraud – Part 2: market manipulation and insider trading

Part 2: market manipulation and insider trading

2017 was the year of crypto-currencies. Besides the many possibilities of this technology, there are also risks involved. A five-part series, with the second topic 'Market manipulation and insider trading'.

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2017 was the year of the Bitcoin, Blockchain and the year that everyone could make a fortune by investing in crypto currencies. 'Experts' had high expectations and price increases of thousands of euros per day were no exception. Crypto currencies also have a downside, though: they lend themselves perfectly to all kinds of fraud. This five-part series highlights the various forms of crypto currency related fraud, including shady exchange offices, market manipulation, money laundering, crypto currency as a means of payment for criminal activities and Initial Coin Offering (ICO). Today we will discuss our second topic: market manipulation and insider trading.

Our first blog on crypto currencies and fraud highlighted the online exchanges that trade in crypto currencies and the risks associated with these exchange offices. People trade on these exchanges to make money by buying and selling crypto currencies at the right time, just like on the stock exchange. Online exchanges may use techniques that are prohibited on other stock markets. We will highlight two of these techniques in this blog: market manipulation and insider trading.

Market manipulation

Financial institutions and individual traders have been severely punished for market manipulation in the past. The most recent scandal concerns the manipulation of exchange rates which resulted in a total of $10 billion in fines imposed on major banks. Similar fraud methods are now regularly seen in today's crypto currency market, for example the 'pump & dump scams’. This form of market manipulation uses special websites and chat groups in apps such as Telegram. A crypto currency is selected and purchased en masse by the entire community on a specific date and time. This causes the exchange rate of the chosen currency to rise suddenly and sharply, which is called a 'pump'. Due to this sudden increase, various exchanges start to refer to the crypto currency as being 'hot'. Many other traders start buying the currency hoping to become the next 'bitcoin millionaire', further increasing its value. At that moment, the community that initially bought the coin on a large scale start to 'dump' it, making a considerable profit. People who did not buy the currency until it was labelled 'hot', suffer a loss. According to Business Insider, UBQ, VCash, Chill Coin, Magi Coin and Indorse were some of the coins afflicted by these pump & dump actions in November.

Insider trading

The prices of crypto currencies fluctuate widely and these fluctuations can be used to make good money by buying and/or selling crypto currencies at just the right time. Knowledge is essential for making a profit, just like on the stock exchange. However, trading on the basis of non-public information is called insider trading. The authorities monitor insider trading on stock exchanges very strictly, e.g. the AFM. But no such supervision is in place for the trading of crypto currencies. One example where insider trading in the crypto market has come to light is the South Korean Financial Supervisory Service where employees sold their Bitcoins just before the same institution announced that Bitcoin would be banned in South Korea. Another example is the sudden rise in the exchange rate of Bitcoin Cash, hours before Coinbase (a crypto exchange) announced that this currency was going to be traded on their platform.

The unregulated market in crypto currencies has resulted in large-scale and, above all, visible acts of market manipulation and insider trading, whereas in other markets these acts lead to billions of fines, redundancies and convictions. Such practices also undermine the general adoption of crypto currencies as a means of payment, as they lead to volatility of the currency’s value. Our regulators and governments protect consumers against these risks in the regular money markets. In the crypto market, however, the cheated consumer will continue to lose out for some time to come.

Whereas insider trading and market manipulation are still a grey area in an unregulated market, there are other criminal activities that are facilitated by the use of crypto currencies as well. Read more about money laundering through crypto currencies in our next blog.

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