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The Blockchain Has Inaugurated A Golden Age Of Criminality

A fun new way to do crime...for summer!

Boosters of blockchain tell us that it will be an invention more significant than the Internet itself, but thus far its benefits remain largely theoretical. The utility of cryptocurrencies to drug dealers is anything but hypothetical, however, as the invention of bitcoin has enabled the flowering of dozens of online drug markets, which have exacerbated an American opioid epidemic projected to claim the lives of one million Americans by 2020.


Cryptocurrencies have also been a godsend to financial fraudsters, as a generation of would-be Jordan Belforts have flocked to these poorly understood collections of computer code to use as the subject of an endless series of pump-and-dump scams. The Wall Street Journal published an investigation this weekend into the so-called pump groups that have popped up on semi-anonymous social media networks like Telegram, which are set up with the explicit purpose of organizing pump-and-dumps using dozens of thinly traded cryptocurrencies. Following a similar exposes in The Outline and Buzzfeed earlier this year, the Journal purports to have identified “175 pump and dump schemes involving 121 different digital coins, which show a sudden rise in price and an equally sudden fall minutes later.”

What sets these scams apart from the pump-and-dumps of yore is that the victims of these crimes appear largely to be people who are looking to perpetrate this fraud on others. Instead of pushing shady penny stocks by convincing wide-eyed grandmas that a crappy dot-com company will be the next AOL, crypto pump-and-dumps are explicit pyramid schemes, in which the victims think they are not the patsies, but in on the scam.

The Outline’s Paris Martineau describes the typical pump and dump process as “surprisingly well-organized.” The pump groups leaders will provide instructions to group members, including the time of the pump, the “target” inflation price and how the signal to begin the pump will be sent. “As it grows closer to pump o’clock, organizers will send out a flurry of reminders and inspiring messages in order to, well, pump up the troops,” writes Martineau.

What is particularly fascinating about the reporting on these scams is that journalists have no trouble finding would-be scammers who know that they probably the true target of the fraud. Rather than being a forum where crypto traders can conspire to defraud an unsuspecting public, these forums are the fraud. “They are 90 percent a scam to take money and the ones at the top will always win,” Brad Spann, an active member of a number of the most popular pump groups, tells The Outline. Despite realizing the severe information asymmetry that exists between himself and the group organizers, Spann and other group members come back time and again for the same reason that gamblers sit at the roulette table, even when they know the odds are against them.

While it may be hard to muster sympathy for people who are scammed out of money due to their impulse to defraud others, the ease with which these frauds are proliferating is disturbing. It’s says nothing flattering about America in 2018 that the best way to bilk people out of their money is not by trying to sell them a penny stock they promise is the next Google. After all, who is gullible enough to believe that anybody but the most well-connected VC backer would actually have the opportunity to invest in the next Google? Fraudsters realized some time after the dot-com crash that such fairy tales are no longer convincing.

Meanwhile, the cops sit on their hands, as the SEC and the CFTC have been eager to signal to their public that they are more concerned about potentially stifling innovation than they are at punishing financial fraud. And even if they wanted to get tough on pump-and-dump fraud on crypto exchanges, they don’t have the same powers to regulate these marketplaces as they do stock exchanges like NYSE.

But if you’re looking for Congress and this Administration to grant such powers, you’ll be sorely disappointed. To the folks running the show in Washington, white collar crime isn’t really crime. After all, it’s not generally committed by immigrants or people of color, rather, it’s committed by people like the President of the United States, or those he literally employs. That’s why white-collar criminal prosecutions are on track this year to be the lowest on record, and why crypto pump and dumpers can rest easy for now, as long as they’re can trust they’re at the top of the pyramid.

Christopher Matthews is a writer who splits his time between New York City and Accra, Ghana, with an interest in the intersection of markets, the economy, and public policy. He previously held staff positions at Axios, Fortune Magazine, and Time Magazine, and has been published in Forbes and Debtwire.



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