Cryptocurrency Manipulators Can Now Go to Jail

What the First Ruling by a Federal Judge on Cryptocurrencies Means. Law firm weighs in.

The past three months have been tough on cryptocurrencies. Bitcoin is down 53% from its peak, Ethereum 48%, Ripple 78%. From the respective peaks among the three, $350 billion have evaporated. Those are just the three largest by market capitalization. New ones come on the scene all the time, still. There are about 1,550 of them. So the question is this: What caused prices to surge so far so fast? And why have they collapsed?

Epic price manipulation is one of the reasons. That has long been known, propagated, praised, and lamented on crypto discussion boards. But it has become so spectacularly rampant – and the fiat currency amounts so large – that it has made its way into the mainstream media.

There are the bots designed to inflate prices. And there are humans. And worries “that the prices of Bitcoin and other digital tokens have been artificially propped up by a widely used exchange called Bitfinex, which has a checkered history of hacks and opaque business practices,” the New York Times reported. “Could Price Manipulation Be Killing Bitcoin?” Vanity Fair asks. “Market manipulation a rising fear,” CBS reports. But it’s not a new phenomenon:

A recently published academic paper in the Journal of Monetary Economics found that a single trader likely drove the price of bitcoin from $150 to $1,200 during a two-month period in 2013 on the Mt. Gox Exchange. Mt. Gox collapsed a year later after a theft of $460 million was discovered.

And why would any of this surprise anyone? Unregulated digital entities, created by just about anyone out of nothing, that assume some value denominated in fiat currency simple because they’re being traded between anonymous people or bots whose only desire is to make prices go up, on unregulated opaque exchanges where everyone thinks price manipulation is good as long as it pushes up the price….

Problems and dissatisfaction with the system only arise when prices collapse, as manipulated prices always do, and as they already have.

Cryptos were new entities, and those that traded them thought they operated beyond regulatory authorities, laws, and jurisdictions. But that theory underwent a radical change recently. Turns out, as of this week, a US federal court agreed that regulators have the authority to send cryptocurrency price-manipulators to Jail in the US.

In 2015, the Commodity Futures Trading Commission (CFTC), which was beginning to crack down on unregistered firms that were trading cryptocurrency derivatives, determined that cryptos were commodities and thus within its regulatory jurisdiction. It then ordered bitcoin-options trading platform Coinflip and its CEO to cease trading since they’d violated CFTC regulations. It also filed, and simultaneously settled, charges against Coinflip.

The CFTC’s theory that it had authority to regulate cryptos was tested in court in a case, filed in January, where the CFTC alleged that defendants Patrick McDonnell and his company Coin Drop Markets were operating a fraudulent scheme involving cryptocurrency trading and misappropriating investor funds. Part of the defense was that the CFTC didn’t have standing to sue because it didn’t have the authority to regulate cryptocurrencies.

Last Tuesday, US District Judge Jack Weinstein for the Eastern District of New York ruled that cryptocurrencies are indeed commodities under the Commodity Exchange Act (CEA) and therefore subject to the CFTC’s anti-fraud and anti-manipulation enforcement authority. This allowed the case to go forward.

With big repercussions, according to an analysis by Skadden, Arps,Slate, Meagher & Flom, one of the largest law firms in the US.

Granting the CFTC’s request for a preliminary injunction against the defendants who allegedly engaged in deception and fraud involving virtual currency spot markets, Judge Weinstein noted that “[u]ntil Congress clarifies the matter,” the CFTC has “concurrent authority” along with other state and federal administrative agencies and civil and criminal courts over transactions in virtual currency.

Skadden’s analysis:

The primary issue before the court was whether the CFTC had standing to sue the defendants under the CEA. To resolve that issue, the court had to determine whether (1) virtual currency may be regulated by the CFTC as a commodity and (2) the CEA permits the CFTC to exercise jurisdiction over fraud in connection with commodities that do not directly involve futures or derivative contracts.

The court answered both questions in the affirmative and held that the CFTC can pursue fraud and manipulation claims in virtual currency spot markets.

First, the court found that the term “commodity” encompasses virtual currency “both in economic function and in the language of the statute.”

According to the court, virtual currencies are “‘goods’ exchanged in a market for a uniform quality and value.” As such, the court reasoned that they “fall well-within” the common definition of commodity as well as the CEA’s broad definition of commodity, which includes “all other goods and articles … and all services, rights, and interests … in which contracts for future delivery are presently or in the future dealt in.”

Second, the court held that the CEA grants the CFTC enforcement authority over fraud or manipulation in both derivatives markets and underlying spot markets. In so ruling, the court nonetheless recognized a significant distinction regarding the CFTC’s regulatory authority over derivatives markets on the one hand and over cash or spot transactions on the other.

Unlike the full regulatory authority the CFTC exercises over the derivative markets, the court explained that the CFTC’s authority over the spot markets extended only to “manipulation or fraud.” For the CFTC’s limited spot market authority, the court pointed to the CEA’s anti-manipulation and fraud provisions under Section 6(c) and CFTC regulations implementing those provisions that prohibit employing a fraudulent scheme “in connection with … a contract of sale of any commodity in interstate commerce.”

This was the first ruling by a federal court to confirm the CFTC’s determination in 2015 that cryptos are commodities under the Commodity Exchange Act, that it can regulate them, and that it can pursue those it alleges to have engaged in fraud and manipulation schemes on crypto exchanges. The CFTC has already filed other enforcement actions of similar nature.

With price manipulation – which was part of the fuel under the surge in prices over the past few years – now becoming a risky rather than a risk-free activity in the US, cryptos are going to face an uphill battle. Cryptos are a lot more fun when you can freely and by hook or crook manipulate prices up and watch the fruits of your handiwork balloon into endless perceived wealth than when these manipulated prices suddenly run out of this fuel and plunge. Turns out, a good time was had by all, but it didn’t last forever.

“If authorities do not act preemptively, cryptocurrencies could become more interconnected with the main financial system and become a threat to financial stability,” warned Agustín Carstens, General Manager of the Bank for International Settlements. Read…   Crypto Crackdown: Bitcoin is a “Combination of Bubble, Ponzi Scheme, Environmental Disaster”

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  36 comments for “Cryptocurrency Manipulators Can Now Go to Jail

  1. John says:

    hmmm, so then do we get to see fiat manipulaters, such as Bernanke, Yellen, and Powell wearing stripes too? Not that they’re the only ones, but it strikes me as rather hyprocritical of TPTB.

    • ScottS71 says:

      okay but seems like cryptos have no real value behind them other then they are limited; what makes them go up or down. Where is the value?

    • Prairies says:

      It is a stretch to compare the 2. No that the government is perfect, but I haven’t heard of companies called “Iced Fiat Currency Tea” spiking on a stock exchange before but with crypto mania it was common place.

    • Quack says:

      Ang gold manipulaters seling naked contracts??

  2. Alex says:

    But manipulating using canceled orders, front-running, and fiat futures buy is A-OK!

    • Lance Manly says:

      All the article says is the crypto exchanges are now subject to the regulators, just like the stock and FX markets. Now whether any of the regulators are aggressive enough in enforcement is another question.

  3. Dwight Eichorn says:

    With all the scams in the crypto space there might not be enough room in traditional prisons. Maybe someone can develop a virtual prison secured by a tangle or hashgraph network.

    This would leave only bitcoin and a handful of others left standing. Go bitcoin.

  4. David Rohn says:

    I guess it means small fish can go to jail; the big ones have been manipulating precious metals, LIBOR and other interest rates, setting up million of fake accounts to screw the working poor out of their grocery money etc., for years; and pay fines out of company coffers with no acknowledgement of wrong doing.
    -it s so cute the way they pretend to regulate and keep fraud out of finance but the whole world knows what s going on, so this sort of announcement just serves to point up how buried in their own bubble the so called authorities and elites of this country really are.

    • Javert Chip says:

      David Rhon

      I was with you right up until you said “…how buried in their own bubble the so called authorities and elites of this country really are…”.

      The problem is voters are not demanding accountability by voting out politicians who do not clean up the regulatory environment. As log as voters tolerate this behavior, it will continue.

      • Laughing Eagle says:

        Yes but in this case it was the courts which gave the CFTC the authority to regulate via a “commodity” label. A non physical state commodity. Question, is that a first?
        CFTC does not want to regulate derivatives, but they want the cryptos.
        It is hilarious the financial boys want regulations when it infringes on their business but then claim it is the regulations which are hurting their bottom lines and we need less of them.

    • futurecryptomillionaire says:

      I guess gold was manipulated all the way from 250 to 1900. Still holding above 1300. I am a big goldbug, just not convinced in the manipulation. I like cryptos as well. They go up and they go down also. It’s all fun to me.

  5. Ken says:

    Don’t steal, the government hates competition.

  6. Gian says:

    But it is OK for me to invest my money in the stock market, where the government allows non GAAP, buybacks and every other manipulative process to “evaporate” my money?

  7. Rates says:

    I was going to protest this injustice but then I remember:
    1. I have Netflix shows to watch.
    2. I have Amazon to buy cheap things from.
    3. I have Thanksgiving to look forward to where I can grab stuff and punch people.
    4. I have Trump to blame for all the nation’s problems.
    5. I have other people to blame for my personal problems.

    Life …. is so beautiful….

    USA, USA, USA.

    • Mike B says:


      Re #5, To Err is Human. To blame someone ELSE for it is even MORE human.

  8. hendrik1730 says:

    Fried air, just like ANY other fiat currency. Then, now and in the future.

  9. James says:

    So is ETH a bad investment now. I keep hearing this is the crypto that will go to 20k next.

  10. Setacos says:

    It seemed to me like the rising Bitcoin price was featured by media very intensely just a few months ago. And then came the stumble and tumble. Does this match anyone else’s perception?

  11. Mehmet says:

    They don’t say “any manipulation of money” is fraudilent; It’s OK if manipulation is under their control…

    • Bubba says:

      YEP. It’s all fear coming from TPTB. TPTB don’t want any crypto gaining more popularity than they can control. And are horribly afraid of people getting control of their own means of a trading currency which is destined to completely bypassing the “traditional, officially approved” methods of commerce. THIS is the basis of cryptos replacing fiat, folks.
      LOVE to all.

      P.S. I will not be surprised if this comment never gets posted.

  12. Given that the regulators have been completely unable to spot manipulation in just about every other market-traded commodity or security*, I don’t think the fear of prosecution is going to deter any cryto-manipulators anytime soon.

    * The exceptions being a few rare cases where they jail individuals without good connections, and a few other rare cases where they wrist-slap megabank shareholders with inconsequential cost-of-doing-business “fines”, while letting those actually culpable – management – stay out of jail.

    Additionally: should the prosecution of crypto-manipulators actually have some teeth for a change, it creates a set-up for the crypto “business” to be hijacked by the Wall Street money-mafia. If the CFTC follows its usual playbook, it will throw the book at the most egregious manipulators among the small-fry startups, leaving the too-big-to-prosecute well-connected firms free to muscle in and take over. To paraphrase Taibbi, the vampire squids have to relentlessly jam their blood-funnels into anything that smells like money, after all.

  13. DK says:

    How appropriate. CBs won’t allow competition. Other forms of fines and incarceration are soon to follow. Something the crypto advocates don’t seem to believe.

    • Rates says:

      The “government” claims monopoly on the following two things: violence and money creation.

      Why would they willingly back off?

      Some of the crypto folks definitely understand this and they act as manipulators. The rest are just roadkill.

  14. Lots says:

    Thank you for observation although the failing New York Times, Vanity Fair, CBS and some “scholarly paper” out of Tel-aviv – making me laugh….

    Here’s how the globalists manipulate it –

  15. The move to indexing seems to prove that stocks are really commodities. Electricity is a commodity which is the primary component of money. Stocks (or at least ETFs) should be treated as commodities, one buyer one seller, and in that regard does any investor need to borrow the shares of an ETF to short it?

  16. raxadian says:

    All I am gonna say is “Buy silver and gold.” one is gonna rise and the other to fall so it will balance out. And long term gold always rises because paper currency like the dollar tends to lose valie.

    Of course long term is ten plus years so is more saving for your old age than anything.

  17. Kenny Logouts says:

    $350 billion ‘evaporated’

    How much negative equity? Probably $350 million.

    Manipulation doesn’t really matter unless you’re buying to hold/speculate.
    If you buy to spend (the whole flipping point!) then it’s not an issue.

  18. chris Hauser says:

    bucket shop.

    it may be a new paradigm, though.

  19. NTesla says:

    Wolf, the genesis block was mined for bitcoin just after the last financial crisis. Crypto was predicted by the economist in 1988. The only way bitcoin could more than 10x last year was central bank and institutional monies; and they have brought bitcoin to its knees. But the total market cap is still 10x what it was around year ago. And you ain’t seen nothing yet imho…

    • Wolf Richter says:

      ETH hasn’t plunged as far as the others, such as Ripple, but it’s still down 55% from the peak. Cryptos are a form of online gambling that makes gamblers money as long as all gamblers pull in the same direction and buy, buy, buy, and as long as all gamblers try very hard doing what you’re doing, which is hyping their gambling tokens to lure more gamblers into the game, because that’s the only way prices can go up. Once gamblers realize that the game is over, it’s over. And at that point, cryptos, which are already useless, become irrelevant.

  20. JustNobody says:

    I think it was invented by the government. It appeared right after the financial collapse. The inventor mysteriously disappears from the face of the planet. Having a million coins worth billions. But yet no one knows who invented it, no family member or friends or colleagues the inventer ever told. It’s against the law to use anything but the U.S. dollar for debt public or private but yet they have let it run. Slowly regulating it along the way. It keeps track of every transaction forever. Arizona just passed a law to except it for taxes. We’ve been going digital for decades, Bitcoin is a test to see if it’s accepted it will be outlawed and the new fedcoin or centralcoin or whatever you want to call it will be introduced as your knew currency. Think about it the perfect currency so they can control every transaction, no cash deals no hiding from taxes. They even depicted it as a gold coin as there symbol to instill confidence in it. Just like Fiat says: in God we trust to instill confidence. It gets way to much media coverage considering all these Cryptos put together don’t have the market cap of apple stock. Gold is the only real money and nobody will ever convince me of anything different.

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