CFTC Warns About Virtual Currency Pump-and-Dump Schemes

05/08/2018 6:00 am EST

Focus: CRYPTOCURRENCY

Dan Rutherford

Deputy Director, Office of Customer Education and Outreach, U.S. Commodity Futures Trading Commission

 

The U.S. Commodity Futures Trading Commission (CFTC) is advising customers to avoid pump-and-dump schemes that can occur in thinly traded or new “alternative” virtual currencies and digital coins or tokens. Customers should not purchase virtual currencies, digital coins or tokens based on social media tips or sudden price spikes. Thoroughly research virtual currencies, digital coins, tokens, and the companies or entities behind them in order to separate hype from facts.

Pump-and-dump schemes have been around long before virtual currencies and digital tokens. Historically, they were the domain of “boiler room” frauds that aggressively peddled penny stocks by falsely promising the companies were on the verge of major breakthroughs, releasing groundbreaking products, or merging with blue chip competitors.

As demand in the thinly traded companies grew, the share prices would rise. 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.

Old scam, new technology

The same basic fraud is now occurring using little known virtual currencies and digital coins or tokens, but thanks to mobile messaging apps or internet message boards, today’s pump-and dumpers don’t need a boiler room, they organize anonymously and hype the currencies and tokens using social media.

Some of these pump-and-dump groups and chat rooms contain thousands of members. The members subscribe to the group and follow the conversations as they indicate when the next pump-and-dump will occur. 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. Links to the phony stories are also accompanied by posts that create false urgency and tell readers to buy now.

Once the pump begins, it can be over in a matter of minutes. 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.

Protect yourself

The best protection for customers is to only purchase alternative virtual currencies, digital coins or tokens that have been thoroughly researched. Remember:

  • Don’t purchase digital coins or tokens because of a single tip, especially if it comes over social media.
  • Don’t believe ads or websites that promise quick wealth by investing in certain digital coins or tokens.
  • Do not participate in pump-and-dump trades; market manipulation is against the law and many participants end up losing money.

Learn more at SmartCheck.gov/VirtualCurrency

This article was prepared by the Commodity Futures Trading Commission’s Office of Customer Education and Outreach. The article is provided for general informational purposes only and does not provide legal or investment advice to any individual or entity. Please consult with your own legal adviser before taking any action based on this information.

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