The undercover operation, codenamed “Operation Token Mirrors,” has culminated in U.S. prosecutors charging 18 individuals and entities, including four major crypto firms—Gotbit, ZM Quant, CLS Global, and MyTrade—for alleged market manipulation and fraudulent trading practices. These firms are accused of engaging in widespread fraud, including “wash trading” schemes that misled investors and artificially inflated the value of over 60 cryptocurrencies.

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: NexFundAI via FBI

“The FBI took the unprecedented step of creating its very own token and company to identify, disrupt, and bring these alleged fraudsters to justice,” stated Jodi Cohen, Special Agent in Charge of the FBI’s Boston Division, in a press release.

Wash trading, a practice where traders simultaneously buy and sell an asset to create artificial trading activity, is at the heart of the charges. The conspirators allegedly inflated the value of tokens like the Saitama Token, which once boasted a market capitalization of $7.5 billion. They then executed “pump and dump” schemes, manipulating prices upward to attract unwary investors before selling off their holdings at the inflated values, leaving investors with losses.

The firms behind these fraudulent activities, including ZM Quant and Gotbit, are accused of facilitating this manipulation by hiring market makers to execute sham trades. These companies allegedly used multiple wallets and trading bots to conceal the true nature of their trades, inflating trading volumes and token prices without genuine market demand.

In one instance, a ZM Quant employee described the wash trading strategy as a way to “make other buyers lose money in order to make a profit.” This scheme deceived investors into believing that the tokens were in high demand, prompting them to buy into the false hype.

Source: FBI

Authorities have already seized over $25 million in cryptocurrency as part of the investigation and disabled several trading bots responsible for millions in fraudulent transactions. Several defendants have pleaded guilty or are in the process of negotiating plea agreements. Others have been apprehended in the United States, the United Kingdom, and Portugal. Assistant U.S. Attorney Joshua Levy emphasized that wash trading is illegal under U.S. financial regulations, and the same laws apply to the rapidly expanding crypto industry.

“This operation is a significant step in cracking down on fraud in the digital asset space,” Levy said. “Wash trading has long been outlawed in traditional financial markets, and now we are holding crypto firms to the same standards.”

The indictment, which includes evidence from Telegram and WhatsApp chats among the conspirators, paints a picture of sophisticated market manipulation. Some conversations involved the use of memes and gifs to celebrate the deceptive practices, adding a layer of irony to the operation. 

The individuals and entities charged span the globe, with some of the more prominent figures including:

– Aleksei Andriunin and Fedor Kedrov of Gotbit Consulting LLC

– Riqui Liu and Baijun Ou of ZM Quant Investment LTD

– Andrey Zhorzhes of CLS Global FZC, LLC

– Liu Zhou of MyTrade MM

These defendants now face serious penalties, including up to 20 years in prison for market manipulation and wire fraud.

The case highlights the continued risks in the crypto market, where rapid innovation often outpaces regulatory oversight. The FBI’s sting operation serves as a warning to other fraudulent actors who may be tempted to exploit the unregulated nature of the space.

Despite the success of “Operation Token Mirrors,” some crypto enthusiasts were quick to criticize the FBI for creating a token that, by design, entrapped those participating in the manipulation. Critics have pointed out the irony of the FBI calling for victims of this scam—who traded NexFundAI unknowingly—to come forward as victims of a crime.

As the crypto market evolves, this case is likely to shape how authorities approach future enforcement actions. The industry, often likened to the “Wild West” of finance, may now face stricter oversight and heightened scrutiny as regulators catch up with the technology.

For now, the defendants remain presumed innocent until proven guilty, but the operation signals a new chapter in the battle against crypto fraud.

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