The Commodity Futures Trading Commission (CFTC), on Thursday, February 15, issued a Customer Protection Advisory warning of pump-and-dump market manipulation schemes in smaller, thinly traded virtual currencies and tokens.
As the CFTC notes, pump-and-dump schemes have been around for quite some time, long before virtual currencies or tokens. Historically, these schemes involved the aggressive peddling of penny stocks under the false promise that the companies were on the verge of major breakthroughs or a major product release. When the share price reached a certain point, the schemers would dump their shares on the open market, causing the price to crash, and leaving investors with nearly worthless stock.
The CFTC is warning that this same basic fraud is now occurring through the use of lesser-known virtual currencies and tokens with small market capitalizations and trading volumes. These virtual currencies and tokens are more easily manipulated because of their small size.
While pump-and-dump schemes were historically made through phone calls initiated in "boiler rooms" (as popularly portrayed in the movie The Wolf of Wall Street), the virtual currency or token variation is often accomplished through mobile messaging apps or Internet message boards. Through these tools, the fraudsters are able to organize anonymously and build artificial hype for their chosen virtual currency or token through social media.
According to the CFTC, this artificial hype is often created through false news reports indicating that an influential investor, celebrity, or business leader is planning to back the virtual currency, or that a major retailer or bank is going to partner with the issuer or sponsor of the virtual currency or token in some form. The CFTC notes that these schemes can be completed in a manner of minutes, through a quick coordinated social media effort, followed by a rapid selloff.
The Customer Protection Advisory therefore warns that customers should not purchase virtual currencies or tokens based on social media tips or sudden price spikes, but instead should make investments based on thorough research.
Significantly, the CFTC also announced it will be offering monetary incentives for information that leads to a successful enforcement action and results in monetary sanctions of more than $1 million against pump-and-dump con artists. In such a case, the whistleblower could be eligible for a monetary award between 10 percent and 30 percent of the penalties imposed.