The U.S. Commodity Futures Trading Commission (CFTC) has issued its first warning against pump-and-dump schemes involving cryptocurrencies while giving advice on how to buy crypto. This warning follows previous warnings by two other U.S. regulators.
The CFTC issued a Customer Protection Advisory on Thursday to warn the public to “beware of and avoid pump-and-dump schemes that can occur in thinly traded or new ‘alternative’ virtual currencies, digital coins or tokens.”
CFTC Director of Public Affairs Erica Elliott Richardson explained, “As with many online frauds, this type of scam is not new – it simply deploys an emerging technology to capitalize on public interest in digital assets,” adding that:
Pump-and-dump schemes long pre-date the invention of virtual currencies…The CFTC encourages all customers to thoroughly research potential investments, stay informed about tactics commonly used in investment fraud, and avoid investment opportunities they don’t fully understand.
Common Pump-and-Dump Tactics
The agency explained that “the organizers of the scheme will commonly spread rumors and urge immediate buying,” often through social media, noting that:
Some pump and dumps use false news reports, typically about a famous high-tech business leader or investor who plans to pour millions of dollars into a small, lesser known virtual currency or coin. Other fake news stories have featured major retailers, banks, or credit card companies, announcing plans to partner with one virtual currency or another.
After a certain length of time following the pump, the Commission states, the dump will begin. “The price falls and victims are left with currency or tokens that are worth much less than what they expected. From beginning to end, these scams can be over in just a few minutes,” the agency describes and immediately advises: “Customers should avoid purchasing virtual currency or tokens based on tips shared over social media.”
What Crypto Buyers Should Do
Citing that its job is to maintain “general anti-fraud and manipulation enforcement authority over virtual currency cash markets as a commodity in interstate commerce,” the CFTC revealed that it has received complaints from customers who have lost money to pump-and-dump schemes. Emphasizing that ultimately, “Customers should not purchase virtual currencies, digital coins, or tokens based on social media tips or sudden price spikes,” the Commission stated:
Customers can best protect themselves by purchasing only alternative virtual currencies, digital coins, or tokens that have been thoroughly researched – to separate hype from facts.
Last month, the CFTC took action against three cryptocurrency operators and their founders for commodity fraud and misappropriation.
CFTC Joins SEC and Finra in Warnings
The U.S. Securities and Exchange Commission (SEC) has repeatedly warned against pump-and-dump schemes as well as market manipulations involving any financial instruments that can be classified as securities. In August, the agency issued a statement alerting investors of pump-and-dump schemes involving initial coin offerings (ICOs).
SEC Chairman Jay Clayton made a statement in December cautioning investors against “promoting or touting the offer and sale of coins without first determining whether the securities laws apply to those actions,” specifically those related to cryptocurrencies and ICOs. “Selling securities generally requires a license, and experience shows that excessive touting in thinly traded and volatile markets can be an indicator of ‘scalping,’ ‘pump and dump’ and other manipulations and frauds,” he described. The chairman then reiterated the same message last week.
In December, the U.S. Financial Industry Regulatory Authority (Finra) also issued a statement warning investors not to fall for crypto-related stock scams including pump-and-dump frauds, advising them to:
Do your research before purchasing shares of any company offering investment opportunities in cryptocurrency…Don’t be fooled by unrealistic predictions of returns and claims made through press releases, spam email, telemarketing calls or posted online or in social media threads. These actions may be signs of a classic ‘pump and dump’ fraud.
A student of Austrian Economics, Kevin found Bitcoin in 2011 and has been an evangelist ever since. His interests lie in bitcoin security, open-source systems, network effects and the intersection between economics and cryptography.
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