Feds Bust Four Crypto Firms in Sting Operation, Seize $25 Million in Crypto

Federal prosecutors are getting creative in order to catch bad actors in the cryptocurrency market. After receiving a tip from the Securities and Exchange Commission, federal prosecutors set up a fake crypto company to investigate a firm based in Boston.

Federal prosecutors have created a fake crypto company to investigate a Boston-based firm and uncover a sting operation that led to the arrest of four firms, the seizure of over $25 million in crypto, and the deactivation of about 60 different cryptocurrencies, according to a press release on Thursday.

The firms and more than a dozen individuals were charged with market manipulation to boost token values, as well as fraud and conspiracy to commit fraud. The charges are the first in the crypto industry related to "wash trading."

The practice involves moving assets back and forth between accounts controlled by the same firm, giving the appearance of higher trading volume and artificially boosting the value of the asset.

The sting came after the SEC tipped off the FBI to potential market manipulation by a Boston-based crypto firm called Saitama, which at one point had boasted a multi-billion market value, the press release said.

The tip prompted prosecutors to launch a fake crypto firm called NexFundAI and create a fake token. Over the monthslong operation, the FBI witnessed three market makers wash trade tokens for crypto clients, offering to manipulate the price of NexFundAI's token via video calls and Telegram chats.

The sting charged ZM Quant, CLS Global, and MyTrade with wash trading related to their communications with NexFundAI. A fourth firm, Gotbit, was not involved with NexFundAI but was charged in a similar scheme. The sting also charged 15 individuals, including six people associated with Saitama.

The firms' trading scheme "allegedly bilked honest investors out of millions of dollars," Jodi Cohen, Special Agent in Charge of the FBI's Boston Division, said in a statement.

The prosecutors say those charges mark the first of their kind in the crypto industry, even as the practice of wash trading has been outlawed and strictly enforced in other financial markets.

"Cryptocurrency is no exception. These are cases where an innovative technology – cryptocurrency – met a century old scheme – the pump and dump. The message today is, if you make false statements to trick investors, that's fraud. Period," Acting United States Attorney Joshua Levy said in a statement released Wednesday.

The charges come as crypto-related scams are on the rise. The FBI's 2023 internet crime report shows crypto fraud cost investors almost $4 billion last year. One kind of scam, "pig butchering," has stolen at least $75.3 billion in crypto in recent years, according to one study.