New warnings from US regulators promise to take action against pump-and-dump digital currency schemes. According to a customer advisory published by The US Commodity Futures Trading Commission (CFTC), whistleblowers could earn a monetary reward in exchange for information leading to sanctions.

Regulation remains an important part of the digital currency discourse. Throughout the world, governments actively seek to regulate digital currencies and eliminate instances of fraud that target investors. The move by US regulators follows the trend of countries taking strides towards regulations surrounding digital currency and its underlying technology, blockchain.

Online boiler rooms

As the CFTC explains, pump-and-dump schemes existed long before digital currencies. Here, the commission relates online pump-and-dump communities to common schemes that attempt fraudulently boost the value of a stock for monetary gain.

“Historically, they [the schemes] were the domain of ‘boiler room’ frauds that aggressively peddled penny stocks,” they said. “When the prices reached a certain point, the boiler rooms would dump their remaining shares on the open market, the prices would crash, and investors were left holding nearly worthless stock. “

With the ease of purchasing digital currencies online, and the emergence of online communities and instant messaging apps, pump-and-dump schemes can be organized quickly, making them a greater threat to investors.

How pump-and-dump schemes operate

The CFTC explains that pump-and-dump groups can contain thousands of members. Under the advisement of the group’s leaders or a group majority, members proceed to all purchase a digital currency at the same time.

Pump-and-dump schemes can be extremely short-lived. In some cases, groups make use of false news reports in order to create the appearance of market demand.

After the price of a currency is successfully raised, pump-and-dump leaders proceed to cash out, leaving the rest of the group to follow.

“Once the pump begins, it can be over in a matter of minutes. In the example above, the buy and sell cycle was over in less than eight minutes,” said the CFTC. “Commonly, it is the people pulling the strings who get out first making the most in the scheme, and leaving everyone else scrambling to sell before losing their investment.”

Supporting US regulators

In an attempt to crack down on the prevalence of online pump-and-dump groups, the CFTC is offering a potential monetary reward to whistleblowers. As they stated, original information that paves the way for successful enforcement action that leads to monetary sanctions of $1 million USD or more, could earn the whistleblower 10-30%.

Members of the public with information about these groups can provide tips to the CFTC through Whistleblower.gov.

Largely, the CFTC is faced with issues stemming from the anonymous nature of many of these online groups. However, to combat this they explained that some digital currency exchanges are taking measures to identify accounts participating in fraudulent activity.

For investors, on the other hand, the CFTC promotes taking personal action to avoid falling victim to these schemes. They advise that investors only purchase digital currencies that have been “thoroughly researched”. Further, they advise against listening to online ads or information that comes from a single or unverifiable source.

 

Image credit: pexels.com

 

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