How FBI used fake crypto tokens to catch alleged market manipulators

• FBI’s fake token sting led to 18 arrests for crypto market manipulation
• Several firms were caught inflating token prices
• FBI has urged victims to come forward for potential restitution

The Federal Bureau of Investigation (FBI) has dusted off a timeless tactic to combat crypto market manipulation and fraud.

The sting operation, which featured a fake crypto token, NexFundAI, helped the bureau trap several fraudulent market makers.

The first-ever criminal charges against financial services firms for crypto market manipulation have been marked by unusual tactics from the FBI, which created its own crypto asset to catch the suspects.

The US Attorney's Office, District of Massachusetts, announced that 18 individuals and entities, including market makers ZM Quant, CLS Global, MyTradem, and Gotbit, have been charged with widespread fraud and manipulation in crypto markets. Some of the accused have already pleaded guilty, and over $25 million worth of crypto assets have been seized.

Additionally, on October 8, the announcement revealed that multiple trading bots tied to "millions of dollars’ worth" of fake trading across approximately 60 different crypto assets had been deactivated.

"These deceptive tactics allegedly attracted new investors and purchasers, resulting in an increase in the tokens’ trading prices," the Attorney's Office said, alleging that the suspects sold their tokens in a "pump and dump" scheme.

An unidentified defendant was quoted in the announcement, stating that their job was to find "other buyers from the community, people you don’t know about or don’t care about" because "we have to make [the other buyers] lose money in order to make a profit."

Meanwhile, the suspects were caught thanks to the FBI, which "took the unprecedented step" of creating its own crypto token and company to identify and apprehend the charged individuals.

For instance, ZM Quant, CLS Global, and MyTrade allegedly agreed to wash trade on behalf of NexFundAI, the crypto company and token created specifically by the FBI.

This case has also caught the attention of crypto industry observers. Conor Grogan, head of product business operations at the Coinbase exchange, noted that the FBI has seemingly revealed their wallets, which have made dozens of trades.

"From what I can tell, FBI-linked wallets have recently deposited to Tokenlon, Binance, Zixipay, and HTX," Grogan added.

If the Coinbase director is correct, the wallets in question also hold Ethereum (ETH) and Pornrocket (PORNRO).

Meanwhile, popular crypto personality Cygaar claims that he notified the FBI that its smart contracts are "in direct violation of the MIT License and thus are subject to copyright infringement."

FBI reaches out to NexFundAI Victims

Following the sting operation, the FBI has contacted victims of NexFundAI and other tokens linked to it.

The agency has set up a dedicated form for individuals who lost funds while trading these tokens to come forward and seek assistance.

Those who fill out the form may be eligible for various services, restitution, and legal protections under federal and state law. The unusual appeal to victims is part of the FBI’s broader effort to root out fraud in the crypto industry.

Acting United States Attorney Joshua Levy said it was the first of its kind operation and identified numerous fraudsters in the crypto industry.

“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. Our Office will aggressively pursue fraud, including in the cryptocurrency industry,”

The FBI also disclosed that the Securities and Exchange Commission (SEC) has filed civil complaints against Gotbit, CLS, ZM Quant, Saitama, and Robo Inu, alleging violations of securities laws related to their conduct.

The FBI rug pull

The crypto community was abuzz after the FBI’s first crypto sting operation. Some users joked that the agency had “rug-pulled” retail investors.

However, many in the crypto community praised the FBI’s approach, cautioning would-be manipulators that the agency was now technologically savvy enough to catch them in the act.

Users shared telling visualisations of the NexFundAI token’s transaction history on social media, highlighting how only fraudulent firms interacted with it.

On-chain analysis tool, Bubblemaps, showed how the FBI had cleverly seeded its wallets, deploying capital to multiple other wallets and making dozens of trades.

The operation marked a first for the agency, but its technique was decidedly old-school: using a classic “honey trap” to catch criminal behaviour.

The stunt has left many in the crypto community wondering what other tricks the FBI might have to combat fraud in the space.

How FBI seized $6 million crypto assets from scammers

Meanwhile, TheRadar earlier reported that the United States Federal Bureau of Investigation (FBI) has confiscated crypto assets worth over $6 million from specialist cryptocurrency scammers who targeted US residents. 

However, the FBI was able to trace victim funds on the blockchain and locate multiple cryptocurrency wallet addresses that still held victim funds totalling more than $6 million.