The FBI Created Its Own Cryptocurrency to Trap Suspects in Fraud Schemes

NexFundAI, which operated on the Ethereum blockchain, was created by the bureau to catch illicit market makers and manipulators.

The Federal Bureau of Investigation (FBI) has created its own cryptocurrency token to catch suspects in fraud schemes, according to a criminal case unsealed on Wednesday.

The token, called NexFundAI, was used by the bureau to identify and disrupt illicit market makers and manipulators. The token was designed to appear as an opportunity to invest in early-stage artificial intelligence (AI) projects on the Ethereum blockchain.

The Securities and Exchange Commission (SEC) alleges that market maker ZM Quant was hired to support NexFundAI trading. The firm is accused of advising NexFundAI's backers on how to artificially inflate the token's price before "cashing out at the peaks."

According to the SEC, trades from ZM Quant accounted for more than 80% of NexFundAI's trading volume. On just one day of trading, NexFundAI on 31 May generated $4,600 in artificial volume.

"What we uncovered has resulted in charges against the leadership of four cryptocurrency companies, and four crypto ‘market makers’ and their employees who are accused of spearheading a sophisticated trading scheme that allegedly bilked honest investors out of millions of dollars," said FBI special agent Jodi Cohen.

“The FBI took the unprecedented step of creating its very own cryptocurrency token and company to identify, disrupt and bring these alleged fraudsters to justice.”

A judge unsealed the criminal case on Wednesday, which was filed by the Department of Justice against 18 individuals and companies. The defendants are facing charges for "widespread fraud and manipulation" as part of the FBI's sting operation, called Operation Token Mirrors.

The SEC said the target schemes used algorithms or bots to generate “quadrillions of transactions and billions of dollars of artificial trading volume each day" in what the agency called "on-demand market manipulation."

One defendant, who met with NexFundAI in person in September, described himself as the "mastermind" and asked for an upfront payment of $2,000, according to the SEC.

DEX Screener shows that NexFundAI is still actively trading with a market cap of around $200,000.

Employees of market-makers Gotbit Consulting, CLS Global FZC, and MyTrade MM are also facing charges, as well as crypto firms Saitama, Robu Inu, VZZN, and Lillian Finance.

At one point, Saitama "boasted a market value of $7.5bn" while its leadership "was actively manipulating the market for the Saitama token and secretly selling their tokens for tens of millions in profits," according to the DOJ. This alleged manipulation was traced back to July 2021 when one Saitama leader proposed a plan to “create an illusion of massive buys and new holders” that would “incite ppl to buy more,” to which another backer replied with a GIF reading “Pump it up.”

“Wash trading has long been outlawed in the financial markets, and cryptocurrency is no exception,” said acting US attorney Joshua Levy, regarding the charges. "These are cases where an innovative technology — cryptocurrency — met a century-old scheme — the pump and dump.”