Cryptocurrency, such as bitcoin, builds on systems that prioritize fraud protection. However, the US Department of Justice led a criminal investigation into bitcoin price manipulation. Questions ask about how that sort of activity can happen.
It shows during three years of blockchain and cryptocurrency research that blockchain systems provide immutable security. The system prevents me from taking money back if I send bitcoin to someone. The technology itself does not allow for transaction reversal.
But this situation is only true if the exchange took place in the system. Furthermore, there are many existing elements of cryptocurrency technology that make fraud very easy.
Bitcoin as a Stock
Bitcoin aficionados do not see cryptocurrencies as a currency like dollars, which looks to be part of the Justice Department’s investigation. They regard bitcoin-like stocks and bonds. As a result, they place orders to buy bitcoin before even closing the sale. Investigators have an interest in spoofing. In this situation, investors place orders only to cancel them before closing the sale. This trick makes it appear like there is a lot of demand for bitcoins when there isn’t.
These manipulations are possible with almost any type of asset. Bitcoin is more vulnerable than stocks or bonds because only a few people own large amounts of it. According to records, the top 1,000 bitcoin accounts held 40% of all existing bitcoins. With only 20% held by 100 accounts.
Many people with huge quantities of Bitcoin have been in the market for many years and know each other. Due to the lack of rules on the cryptocurrency market, these users can coordinate to increase or reduce the value of bitcoin, but doing so may be illegal.
With cryptocurrency trading being new, a couple of protections already exist. For example, being naturally high in volatility when it comes to stock prices can easily trigger circuit breakers located in the U.S. Stopping trading and rebooting its prices limits only to investors’ losses. With that, it is known that cryptocurrency markets have no built-in mechanisms.
Taking advantage of Anonymity
A type of fraud dubbed “wash trading” is also under investigation by the Justice Department. This activity involves a real buyer and seller negotiating a bargain with themselves. This action makes the market look like it’s having a lot of activity, artificially increasing its demand and value.
Anyone can create as many cryptocurrency accounts as they like. Along with that, many blockchain-based systems keep their users’ identities anonymous. The transaction itself, imagining that it will push through, is being recorded and is open for public view. However, the users identify only with their own bitcoin addresses which has a long-complicated combination code that looks like this “1ExAmpLe0FaBiTco1NADr3sSV5tsGaMF6hd.”
This kind of fraud is very hard to prove and is giving authorities challenges in identifying fraudsters. Last June, a former federal prosecutor testified that investigations into cryptocurrency revealed an individual account is more likely to be “Mickey Mouse” at “123 Main Street.”
Few countries have started regulating the cryptocurrency market under existing or new regulations. For example, in 2015, a federal investigation revealed that Ripple Labs failed to comply with anti-money laundering laws and regulations when collecting valid consumer identifying information.
40 jurisdictions along with U.S. states, Canadian provinces, and national regulators in the same countries launched a formal probe known as “Operation Cryptosweep,” in May 2018. This is created to crack down on deceitful cryptocurrency trading. They articulated roughly 70 investigations and informed almost 35 companies about allegations of violating security law.
However, most cryptocurrency trading takes place in countries with few rules and weak controls. For example, it reported that from early 2014 to early 2017, approximately 90% of global bitcoin training revolved around the Chinese cryptocurrency exchange. Most of these companies say to have falsely inflated their trading volumes to attract new users. Since then, China bans online cryptocurrency trading, but people keep finding loopholes.
The importance of international cooperation emphasizes in the investigation as the problem is likely to transfer to other countries where there are no strict regulations. Cryptocurrency, being a global phenomenon, will have to work together to be able to protect its users. This applies especially to those nations that have many trading activities.