How can criminals manipulate the digital market?

“Technology is neither good nor bad; nor is it neutral.” – Melvin Kranzberg

Technology, specifically blockchain technology has changed a lot about how we operate. The main asset of blockchain technology is how secure and private it is. Cryptocurrencies use blockchain technology in order to make sure their transactions are safe and private. Yet, the U.S Department of Justice had launched a probe into the manipulation of bitcoin prices. How is that kind of action even possible?

For every lock, there is someone out there trying to pick it or break in.” – David Bernstein

If you dig in into the details of blockchain platforms and cryptocurrencies, you will find that blockchain systems have some enduring security features. For example, if I sent you some amount of bitcoin, and this transaction gets recorded on the blockchain network, there is no way of getting my money back. The system is structured in a way that does not allow transactions to be reversed.

But that holds true only when the transactions happen within the system. There are other aspects of cryptocurrency technologies that make extortion possible.

Trading bitcoins as stocks

The Justice Department launched the probe into bitcoin prices because cryptocurrencies are not yet treated as a viable mode of payment, like Dollars or Euros. Instead, the Department treats bitcoins as assets, like stocks and bonds. “Spoofing” is a type of con that investigators are looking into. Spoofing is when people place orders, but cancel them before the deal is verified – often without paying a service fee. This creates the impression that the bitcoin is worth more than it actually is.  

This sort of manipulation is possible with almost every other asset. Bitcoin is more prone to it because many people hold large amounts of the coin. About 1,000 accounts carry 40% of all the bitcoins in existence, which leaves just 20% bitcoins in the other accounts.

Several people who are cryptocurrency enthusiasts, and own large amounts of bitcoin have been in the community for so long that they are familiar with each other. They can take combined efforts to make the prices increase or decrease- and because there is no regulation in the digital market, it might not even be out of the law for them to do so.

Exploiting Invisibility

Sometimes a user sets up a deal which appears like an appropriate purchase, but in reality makes the deal with himself or herself. These deals make it seem like there is a lot of activity going on in the market than there actually is, thus unnaturally increasing demand and value.  This process is referred to as “Wash Trading”.

A user can have multiple accounts set up and the blockchain systems tend to keep their users anonymous. The transactions that take place are stored on a blockchain network and are completely visible but the accounts linked to them are only recognised with bitcoin addresses. These addresses are usually alphanumeric codes.

This anonymity raises a challenge and makes it very hard to prove that wash trading is actually happening. The law cannot identify criminals or fraudsters due to the anonymity. At a congressional hearing, a former federal prosecutor even mentioned “Mickey Mouse” living at the “123 Main Street” as one of the account holders.

Enhancing Oversight

Countries have started to regulate the cryptocurrencies either with existing regulations or with new ones. In 2015, an investigation revealed that Ripple Labs had not obeyed anti money laundering laws and rules about getting accurate customer identification information.

In May 2018, 40 jurisdictions involving U.S states and the Canadian provinces announced a probe “Operation Cryptosweep” to shut down frauds in the market. This probe paved the way for over 70 investigations and cautioned about 35 companies about disobeying security rules and regulations.

Maximum amount of trading takes place in countries where regulations are poor and the law enforcement is low. From early 2014 to 2017, China became the target of global bitcoin trading. Almost 90% of the overall bitcoin trading took place in China, where some users artificially inflated trading volumes. After this episode China has banned all online cryptocurrency trading, but hackers are finding alternatives.

The complication will most probably shift to other countries where rigid rules are absent, highlighting the need of international cooperation in investigations. Cryptocurrencies are very powerful and are a global phenomenon. So the world’s nations will have to work together in order to protect their customers.

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