CFTC Warns Investors To Avoid Cryptocurrency Pump-and-Dump Schemes

Announcements, Crime, News | February 16, 2018 By:

The US Commodity Futures Trading Commission (CFTC) has issued a consumer advisory warning against cryptocurrency pump-and-dump schemes.

In a pump-and-dump, fraudsters create a new token and start mining. Later, the fraudsters spread hype and investors buy in. Supply goes down, demand and price go up. The scammers continue for a while and dump all the tokens on the market, making money for themselves but ruining the cryptocurrency in the process. Pump-and-dump schemes are mostly anonymous and are organized in public chat rooms or via mobile messaging apps.

In a statement Thursday, the CFTC said investors should be wary of thinly traded markets, such as cryptocurrencies, because they often promote illicit trading behavior. It added that investors should avoid trading based on information obtained from social media.

“The organizers of the scheme will commonly spread rumors and urge immediate buying,” the CFTC said. “Victims will commonly react to the currency’s or token’s rising prices, and not verify the rumors. Then the dump begins. 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 CFTC warned 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 cryptocurrency.

“Other fake news stories have featured major retailers, banks, or credit card companies, announcing plans to partner with one virtual currency or another,” the regulator said. “Links to the phony stories are also accompanied by posts that create false urgency and tell readers to buy now.”

CFTC Director of Public Affairs Erica Elliott Richardson advised investors to thoroughly research potential investments, stay informed about tactics commonly used in investment fraud, and avoid investment opportunities they don’t fully understand.

The consumer advisory warning comes after a CFTC hearing a day earlier, in which CFTC Commissioner Brian Quintenz urged cryptocurrency companies to regulate themselves. CFTC Chairman Christopher Giancarlo also called for self-regulation in his testimony before the Senate Agriculture Committee on Thursday.

“They need to know they’ve got a responsibility in cleaning up this industry if they really wanted to be something that bears the respect and becomes part of not only our future but their future as well,” Giancarlo said.