The U.S. Commodity Futures Trading Commission (CFTC) has recently issued an advisory and bounty for whistleblowers providing information on cryptocurrency pump-and-dump schemes. The agency is advising customers to be wary of these schemes that commonly prop up scarcely traded cryptocurrencies.
The CFTC advisory stated:
“If you have original information that leads to a successful enforcement action that leads to monetary sanctions of $1 million or more, you could be eligible for a monetary award of between 10 percent and 30 percent.”
Within the advisory, the CFTC also stated that people who provide “original information that leads to a successful enforcement action that leads to monetary sanctions of $1 million or more” are eligible for a reward of 10 to 30 percent of the sanction.
According to the CFTC, “pump-and-dump” is a phrase commonly affiliated with penny stock schemes, where groups of traders would falsely “pump” a company. They would do so by “falsely promising the companies were on the verge of major breakthroughs, releasing groundbreaking products, or merging with blue chip competitors.” This fraudulent information would increase the demand in “thinly traded companies,” and in turn, the share prices would rise. Once the prices struck a certain point, the trading group would then “dump” its shares, leaving investors with worthless stocks.
The old scam is now being reframed to fit cryptocurrency technology, utilizing private group messaging apps like Discord and Telegram. On these apps, the CFTC reports, pump-and-dump traders organize groups anonymously. Some of these groups have thousands of subscribers waiting for messages indicating the next altcoin to be pumped and dumped. Once a cryptocurrency was ready to be “pumped,” messages would be issued to count down the buy signal.
The pump-and-dump cycle sometimes takes just minutes. Owners of the groups often have the cryptocurrency that’s to be pumped already bought, giving them an advantage to cash in on profits and leaving the rest of the people in the group racing to save what’s left of their investment when the price begins to tank.
False news reports are a commonly used method to promote these schemes. Groups reportedly spread fake news stories about famous business leaders, major retailers, banks, or credit card companies announcing plans to partner or invest in certain cryptocurrencies.
Erica Elliott Richardson, CFTC Director of Public Affairs, said in a statement:
“Pump-and-dump schemes long pre-date the invention of virtual currencies, and typically conjure the image of penny stock boiler rooms, but customers should know that these frauds have evolved and are prevalent online. Even experienced investors can become targets of professional fraudsters who are experts at deploying seemingly credible information in an attempt to deceive. The CFTC encourages all customers to thoroughly research potential investments, stay informed about tactics commonly used in investment fraud, and avoid investment opportunities they don’t fully understand.”
The CFTC has reported receiving numerous complaints from people losing money in pump-and-dump campaigns. The commission advises people purchasing alternative cryptocurrencies to remember the following:
“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.
There is no such thing as a guaranteed investment or trading strategy. If someone tells you there is no risk of losing money, do not invest.”