FBI Creates Fake AI Cryptocurrency to Expose Market Manipulation in Crypto Industry

FBI Creates Fake Cryptocurrency to Expose Widespread Crypto Market Manipulation

The U.S. Department of Justice (DoJ) has announced arrests and charges against several individuals and entities in connection with allegedly manipulating digital asset markets as part of a widespread fraud operation. The law enforcement action - codenamed Operation Token Mirrors - is the result of the U.S. Federal Bureau of Investigation (FBI) taking the "unprecedented step" of creating its own cryptocurrency token and company called NexFundAI. NexFundAI, as per information on the website, was marketed as redefining the "intersection between finance and artificial intelligence" and that its aim was to "create a cryptocurrency token that not only serves as a secure store of value but also acts as a catalyst for positive change in the world of AI." "Three market makers -- ZM Quant, CLS Global, and MyTrade -- along with their employees are charged with allegedly wash trading and/or conspiring to wash trade on behalf of NexFundAI, a cryptocurrency company and token created at the direction of law enforcement as part of the government's investigation," the DoJ said. "A fourth market maker, Gotbit, its CEO, and two of its directors are also charged for perpetrating a similar scheme." A total of 18 people and entities have been ensnared in the investigation's net, out of which five defendants have either pleaded guilty or agreed to plead guilty. Three other defendants have been arrested in the U.S. state of Texas, the U.K., and Portugal. More than $25 million in cryptocurrency has also been confiscated and multiple trading bots behind wash trading (aka round trip trading), which refers to the illegal practice of buying and selling the same financial instruments to create artificial market activity, for about 60 different cryptocurrencies have been disabled. Court documents allege that the defendants behind the cryptocurrency companies executed bogus trades using their own tokens to give the impression that they are good investments in an attempt to attract new investors and purchasers, thereby synthetically inflating the tokens' trading prices. The individuals then sold their tokens at the new prices, a fraudulent scheme known as pump-and-dump, in order to illegally profit from the financial crime. The following individuals and cryptocurrency firms have been charged - "Today's enforcement actions demonstrate, once more, that retail investors are being victimized by fraudulent activity by institutional actors in the markets for crypto assets," Sanjay Wadhwa, deputy director of the SEC's Division of Enforcement, said. "With purported promoters and self-anointed market makers teaming up to target the investing public with false promises of profits in the crypto markets, investors should be mindful that the deck may be stacked against them."

FBI creates fake cryptocurrency in sting operation to catch market manipulators

In brief: The FBI is known for elaborate sting operations, but its recent takedown of an alleged group of fraudsters working the crypto market was particularly innovative because it created its own token as part of the ruse. This operation marks a significant step in law enforcement efforts to combat criminal behavior in the rapidly evolving cryptocurrency space. The Federal Bureau of Investigation created its own cryptocurrency token as part of an operation to catch fraudsters in the crypto market. The sting, dubbed Operation Token Mirrors, led to charges against 18 individuals and several companies for widespread fraud and market manipulation. The FBI's token, NexFundAI, was an Ethereum-based cryptocurrency promoted as an investment vehicle for early-stage AI projects. Unbeknownst to the alleged fraudsters, the FBI created the token to lure and expose those engaged in illegal market practices. Four crypto firms - Gotbit, CLS Global, MyTrade, and ZM Quant - and 18 individuals now face charges for artificially inflating token prices through fraudulent trades. The defendants allegedly used a practice known as wash trading, where fake trades are executed to create the illusion of high trading activity and demand. ZM Quant, one of the accused market makers, reportedly accounted for over 80% of NexFundAI's trading volume in May. The firm allegedly advised on how to artificially inflate the token's price, unknowingly participating in the FBI's sting operation. "This investigation, the first of its kind, identified numerous fraudsters in the cryptocurrency industry. Wash trading has long been outlawed in traditional financial markets, and cryptocurrency is no exception," Acting US Attorney Joshua Levy said. The operation resulted in the seizure of more than $25 million in cryptocurrency and the deactivation of trading bots responsible for manipulating approximately 60 different cryptocurrencies. Four defendants have already pleaded guilty, with others arrested in Texas, the United Kingdom, and Portugal. Jodi Cohen, Special Agent in Charge of the FBI's Boston Division, described the operation as "a new twist to old-school financial crime." She said that the FBI's creation of a cryptocurrency token was an unprecedented step in identifying and disrupting fraudulent activities in the crypto space. The Securities and Exchange Commission has also filed civil complaints against several involved entities for alleged securities law violations. The charges include market manipulation, conspiracy to commit money laundering, and wire fraud, which can lead to sentences of up to 20 years. Perhaps not surprisingly, the operation has sparked some pushback. A pseudonymous developer known as cygaar claimed that the FBI appeared to have copied several OpenZeppelin libraries without adhering to the MIT License requirements. Additionally, the FBI may have inadvertently exposed its own wallets used in the operation. Coinbase director Conor Grogan noted that the wallet used to seed NexFundAI distributed capital across several wallets and executed trades, potentially impacting future investigations. Grogan found that FBI-linked wallets own coins like Pornrocket, EthereumMAX, and BONE. The FBI is now reaching out to potential victims of NexFundAI and related tokens, setting up a dedicated form for those who may have lost funds.

FBI token: How the FBI used a fake AI fund coin to nab fraudsters

The United States Federal Bureau of Investigation used a fake AI fund crypto to catch alleged fraudsters engaged in market manipulation. According to an Oct. 7 indictment in Massachusetts Federal District Court, the coin, which the agency called "NexFundAI (NEXF)," was presented as a crypto security that claimed to represent shares in an artificial intelligence-related fund. Per the indictment, the FBI told scammers that it wanted help to manipulate the token's trading volume. This would fool investors into believing that the coin was more popular than it actually was. The scammers offered to help with the fraud, and the agency used the evidence collected during this process to get an indictment against them. This is the first time the FBI has admitted to creating a cryptocurrency as part of its investigations and the first time it has charged a crypto market maker with price manipulation. Crypto market makers have often been accused of manipulating prices in the past. The FBI reportedly discovered in July 2024 that crypto market-making firm MyTrade MM was offering to guarantee a minimum and maximum volume to token issuers. It allegedly made this offer on its website. The agency's undercover officers met with a team member from crypto exchange LBank on Aug. 20. LBank used MyTrade as a market maker. The officers agreed to launch the NEXF token on LBank and use MyTrade as a market maker. Later, the officers met with MyTrade founder Liu Zhou, also known as "David Zhou" or "DZ," who allegedly explained in great detail how the firm used wash trading to artificially increase volume and fool investors into buying coins that have no real organic interest, as well as how it facilitates pump and dumps. "We have to make them lose money in order to make profit and get the listing fee back," Zhou allegedly stated to the officers. The NexFundAI token launched on or around Oct. 2 on the LBank exchange. On that day, MyTrade MM conducted "millions of dollars' worth of wash trades for approximately 60 clients," the indictment states. Related: SEC, FBI, DOJ coordinate takedown of fraudulent crypto firms It charges Zhou and two co-conspirators with conspiracy to commit market manipulation and wire fraud, which carries a sentence of up to five years in prison. According to an Oct. 9 United States Justice Department (DOJ) announcement, Zhou has agreed to plead guilty to the crime. The DOJ simultaneously announced that 18 individuals were being charged in multiple crypto market manipulation cases, of which the NexFundAI case was only one. Three conspirators were mentioned in the NexFundAI case, but only Zhou was named and charged. Is NexFundAI the same as the BE54c coin? Some crypto users have speculated that the token named in the indictment is the one located at Ethereum address 0x16ca471aE755f8a2cD4eC315A4a7439dcfEBE54c. For example, blockchain analytics firm Bubblemaps posted to X on Oct. 10 stating, "So the @FBI launched a token...and the bubble map looked like this..." It provided a link to the Bubblemaps page for the BE54c token. On the same day, Pop on Punk, creator of the G8keep token discovery protocol, also claimed that the BE54c token is the correct one. They claimed to be the contract's auditor and posted crying emojis in response to the thought that they had helped the FBI. Coinbase director J. Connor Grogan agreed that the BE54c coin is the correct one. He stated that the FBI created the coin using a wallet account ending in bf3. This account was funded by another wallet, which was itself funded by a wallet containing a token called "Pornrocket," which Grogan seemed to think was humorous. The BE54c token could be the one created by the FBI. It has the same name as the one mentioned in the indictment, and it was created on May 29, just four months before the FBI launched their token on LBank exchange. No connection to LBank However, Arkham Intelligence data shows no direct connection between the BE54c token's deployer account and any known LBank wallet. This suggests that it may be a copycat of the FBI token rather than the real one or that the BE54c is the original "NexFundAI" coin, while the FBI's token is named after it. This does not definitely prove that the BE54c token was not created by the FBI. It's possible that Arkham's data on LBank wallets is incomplete or that the tokens were transferred to another account before being deposited to the exchange. However, it implies that further evidence would be needed to prove that this token is the one named in the indictment. Allegations of market manipulation continue to plague the crypto space. On Sept. 29, Dutch regulator AFM warned token issuers that pump-and-dump scams will be explicitly prohibited in the European Union after Dec. 30. In June, the Italian government announced that it would also step up enforcement, levying fines as high as 5 million euros against individuals who manipulate the market through prohibited forms of trading.