The Federal Bureau of Investigation (FBI) has revived a proven method to combat fraudulent cryptocurrency trading. A sting operation using a fake cryptocurrency token allowed the agency to arrest a number of fraudulent buyers and sellers.
The FBI took the risky move of developing its own cryptocurrency token, NexFundAI, as part of this law enforcement operation, which was called Operation Token Mirrors.
According to its website, NexFundAI claimed to be transforming the “intersection of finance and artificial intelligence”. Its stated goal was to provide a cryptocurrency token that would offer an extra layer of financial security while also fostering positive change in the AI industry.
However, federal authorities accused some participants of engaging in fraudulent practices, such as “wash trading” – transactions made solely to inflate trading volumes artificially. Higher transaction volumes typically signal increased investor interest, suggesting potential growth and encouraging price increases.
In the case of wash trades, however, related or even identical entities manipulate the market by creating a false impression of demand, a technique often linked to “pump and dump” schemes.
How NexFundAI Played a Key Role in the FBI’s Crypto Sting
The FBI planned a sting operation using the fake Ethereum cryptocurrency NexFundAI over a period of many months. As the token became more well-known, agents developed strategic alliances with four important trading companies who were all thought to be involved in pump-and-dump scams.
According to DoJ:
Three market makers — ZM Quant, CLS Global, and MyTrade — along with their employees are charged with allegedly wash trading and/or conspiring to wash trade on behalf of NexFundAI, a cryptocurrency company and token created at the direction of law enforcement as part of the government’s investigation.
The FBI said in a document released on Wednesday, October 9, that four defendants had already entered guilty pleas and that a fifth was scheduled to follow suit. This week, authorities arrested three other individuals in Portugal, the UK, and Texas.
Authorities blocked many trading bots engaged in wash trading, commonly referred to as round trip trading, and seized over $25 million worth of cryptocurrencies.
This illicit technique includes purchasing and selling the same financial assets in order to generate fake market activity. The bots were manipulating about sixty different coins.
According to court documents, the defendants behind these cryptocurrency companies engaged in fraudulent trades using their own tokens to give the appearance of a sound investment, enticing new investors and artificially raising the token values.
The effects of Operation Token Mirror are probably going to continue longer than the 18 people who were arrested. It will cause other financial scammers to reconsider their plans, as they will examine if the FBI or another law enforcement agency is keeping an eye on the coins they want to influence through wash trading.
The FBI has contacted victims of NexFundAI and associated tokens after a sting operation. The agency urges those who lost money trading these tokens to come forward for help by setting up an exclusive form.
According to federal and state law, anyone who fill out the form can be eligible for reimbursement, legal protections, and other benefits. The FBI’s wider initiative to fight fraud in the bitcoin industry includes a request to victims.
Joshua Levy, the acting U.S. attorney, highlighted that this was the first investigation of its sort and that it exposed many scammers in this market. The FBI also disclosed that Gotbit, CLS, ZM Quant, Saitama, and Robo Inu have all been accused of civil charges from the Securities and Exchange Commission (SEC) alleging violations of securities laws.
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