By Matt Robinson, Tom Schoenberg/ Bloomberg
As Bitcoin plunges, the U.S. Justice Department is investigating whether last year’s epic rally was fueled in part by manipulation, with traders driving it up with Tether -- a popular but controversial digital token.
While federal prosecutors opened a broad criminal probe into cryptocurrencies months ago, they’ve recently homed in on suspicions that a tangled web involving Bitcoin, Tether and crypto exchange Bitfinex might have been used to illegally move prices, said three people familiar with the matter.
Bitfinex has the same management team as Tether Ltd., a Hong Kong-based company that created the namesake cryptocurrency. When new coins come to market, they’re mostly released on Bitfinex.
Some traders -- as well as academics -- have alleged that these Tethers are used to buy Bitcoin at crucial moments when the value of the more ubiquitous digital token dips. JL van der Velde, the chief executive officer of Tether Ltd. and Bitfinex, has previously rejected such claims.
Bitfinex’s general counsel, as well as outside lawyers for the exchange and Tether Ltd., didn’t respond to phone calls and emails seeking comment.
The Justice Department’s probe adds to an existing inquiry into possible misconduct. Both Tether Ltd. and Bitfinex received subpoenas last year from the U.S. Commodity Futures Trading Commission, Bloomberg reported in January. The Justice Department and CFTC are coordinating their examinations, the people said.
It couldn’t be determined whether government officials are solely investigating activity that occurred on Bitfinex or if exchange executives are suspected of illegal behavior. Neither the Justice Department nor the CFTC has accused anyone of wrongdoing, and authorities may ultimately conclude that nothing illicit occurred.
Spokeswomen for the Justice Department and CFTC declined to comment.
Cryptocurrencies captured investors’ attention in 2017 with Bitcoin surging to a record high of about $20,000 last December. But it’s been a different story this year as many on Wall Street have concluded the market was a fad. Another factor in Bitcoin falling below $4,225 Tuesday: Scrutiny by government officials, who’ve repeatedly warned that the mostly unregulated industry is likely rife with fraud.
A focus of the Justice Department’s investigation is whether the dramatic rise of digital tokens in recent years was purely driven by actual demand, or was partially fanned on by market tricks. Along with the CFTC, prosecutors have been looking into a number of trading strategies, including spoofing -- the illegal practice of flooding the market with fake orders to trick other traders into buying or selling, Bloomberg reported in May.