The FBI recently revealed a novel tactic in its fight against cryptocurrency crime: the creation of its own cryptocurrency, NexFundAI. Developed in secrecy as part of a sting operation, the Ethereum-based token was designed to expose and dismantle pump-and-dump schemes, a prevalent form of market manipulation in the crypto space.

Working with cooperating witnesses, the FBI launched NexFundAI to infiltrate the murky world of crypto trading and gather evidence against individuals and entities engaged in fraudulent practices. 

The FBI, known for its innovative tactics in combating crime, took the unprecedented step of establishing NexFundAI on the Ethereum blockchain. The bureau created a website for the token, designed to appear like any other cryptocurrency project, complete with detailed descriptions of the token’s purpose and potential. However, this token was a trap to attract fraudulent crypto firms that specialized in inflating trading volumes and prices for profit.

Source: FBI

This operation culminated in the Department of Justice filing charges against 18 individuals and entities for orchestrating widespread fraud and manipulation in the crypto markets. The Securities and Exchange Commission also brought charges against three market makers and nine individuals involved in similar schemes.

According to prosecutors, these defendants artificially inflated the prices of crypto assets through a combination of false claims and “wash trades,” a deceptive practice that creates a false appearance of trading activity. The three key market makers implicated in the scheme – ZMQuant, CLS Global, and MyTrade – were unknowingly complicit in the operation, as they executed wash trades on behalf of NexFundAI, unaware that it was an FBI creation. These fraudulent trades were designed to lure unsuspecting investors and drive up the value of tokens, allowing the orchestrators of the scheme to profit handsomely.

Special Agent Jodi Cohen, who spearheaded the investigation from the FBI’s Boston division, described the case as a modern iteration of traditional financial fraud, exposing a sophisticated network of individuals and companies accused of defrauding investors out of millions of dollars.

One particularly brazen figure, Liu Zhou, a market maker at MyTrade, allegedly boasted to promoters of NexFundAI about his team’s ability to manipulate the market with impunity. Zhou claimed they could “control the pump and dump” and engage in insider trading without detection.

Despite these claims, the FBI’s sting operation successfully shut down NexFundAI’s trading activity and led to the recovery of $25 million in fraudulent proceeds, which will be returned to the victims of the scheme.

The FBI’s 2023 IC3 Cryptocurrency Report highlights over 69,000 cryptocurrency-related complaints, with losses exceeding $5.6 billion, marking a 45% increase from 2022. Investment frauds accounted for 71% of all losses. 

Source: FBI

Other scams include tech support, extortion, and government impersonation. Criminals exploit crypto’s decentralized and irreversible nature for fraud and money laundering.

Source: FBI

The report stresses rapid complaint reporting and provides tips for avoiding scams. Older victims reported the highest losses, especially from confidence-enabled investment fraud. For more details, see the full report here.

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