The CFTC has announced that it will pay between 10% and 30% to whistleblowers who report about people involved in crypto currency (digital token) pump-and-dump schemes, as long as the information leads to a successful enforcement of a monetary penalty of $1 million or more.
The U.S. Commodity Futures Trading Commission (CFTC) has also advised investors to avoid pump-and-dump schemes that can occur in thinly traded or new “alternative” virtual currencies and digital coins or tokens. Furthermore, it has asked crypto currency investors to avoid purchasing virtual currencies, digital coins, or tokens based on social media tips or sudden price spikes.
The CFTC, in its announcement, has asked investors to thoroughly research virtual currencies, digital coins, tokens, and the companies or entities behind them in order to separate hype from the facts.
Pump-and-dump schemes have been around long before virtual currencies and digital tokens. Historically, they were the domain of “boiler room” frauds that aggressively peddled penny stocks by falsely promising the companies were on the verge of major breakthroughs, releasing groundbreaking products, or merging with blue chip competitors. As demand in the thinly traded companies grew, the share prices would rise. When the prices reached a certain point, the boiler rooms would dump their remaining shares on the open market, the prices would crash, and investors were left holding nearly worthless stock.
According to CFTC
“The same basic fraud is now occurring using little known virtual currencies and digital coins or tokens, but thanks to mobile messaging apps or Internet message boards, today’s pump-and-dumpers don’t need a boiler room, they organize anonymously and hype the currencies and tokens using social media.”
The CFTC has stated that it has received complaints from customers who have lost money to pump-and-dump schemes. While its regulatory oversight authority over commodity cash markets is limited, the CFTC maintains general anti-fraud and manipulation enforcement authority over virtual currency cash markets as a commodity in interstate commerce.
How can you protect from pump-and-dump scheme?
CFTC has issued the following advice:
• 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.