Cryptocurrency exchanges are rife with “pump and dump” scams that would be illegal in most markets and leave unsuspecting investors at risk of large losses, a Business Insider investigation has found.
Crypto traders are using the secure messaging app Telegram to orchestrate the scams. Their strategy is to suddenly inflate the price of a cryptocurrency by coordinating a few buyers to act at specific times.
Then, after the price rises, they attract other, unwitting investors to buy into the price momentum. The “pumpers” quickly sell the coin to make a profit. The coins often crash just minutes after the initial surge, leaving the second wave of investors with losses.
The same scam was most famously carried out in the stock market by the “Wolf of Wall Street” Jordan Belfort, the convicted securities fraudster whose exploits were turned into a film starring Leonardo DiCaprio.
Business Insider observed “pump and dumps” for the cryptocurrencies UBQ, VCash, Chill Coin, Magi Coin, and Indorse over the last two weeks alone. All the scams took place on either Las Vegas-based exchange Bittrex or Russian exchange Yobit.
Ben Yates, a senior associate at law firm RPC who has looked closely at the space, told Business Insider: “It’s clear from even casual monitoring of the exchanges that this sort of activity is rife, particularly with altcoins with smaller circulation.”
Cryptocurrency exchanges and markets are unregulated in most parts of the world and so these activities are not illegal. However, they highlight the risks associated with this new corner of finance, which has attracted huge amounts of capital in 2017 but is regarded as the “wild west” by critics.
“Pump and dump” schemes are illegal in government-regulated public stock markets, like the London and New York stock exchanges. Several securities lawyers BI spoke to argued that cryptocurrency exchanges should be regulated in the same way. The US Securities and Exchange Commission has said digital currencies are likely to fall under existing securities laws, but it has so far taken little enforcement action.