Pump and Dump (P&D) is a manipulative scheme where individuals or groups artificially inflate the price of a cryptocurrency through coordinated buying and promotion, only to sell off their holdings at the inflated price, leaving other investors with losses.^[2]

Phases

Accumulation Phase

In this phase, the attackers select an asset with low trading volume and price. They start accumulating a significant amount of the asset at a relatively low cost.^[3]

Pump Phase

Once the swindlers have accumulated a substantial position in the chosen asset, they begin to spread false or exaggerated information about the asset's potential. This information is spread through various channels, including social media, online forums, etc. As more and more investors buy-in, the demand for the asset increases, causing its price to rise rapidly.

As news of the asset's apparent success spreads, more investors flock to join the action, driven by the Fear of Missing Out (FOMO). The increased buying pressure perpetuates price inflation, creating a self-fulfilling prophecy where demand fuels demand.^[3][2]

Dump Phase

When the asset's price has been artificially inflated to a desirable level, the attackers start selling off their holdings. This sudden surge of selling activity overwhelms the buying demand, leading to a sharp decline in the asset's price. Other investors who bought in during the pump phase are left with assets that have significantly decreased in value.
^[1]

P&D Prevention

To prevent or avoid such acts, regulatory authorities, and financial exchanges implement measures, such as, monitoring unusual trading patterns, implementing trading halts on suspicious assets, and suspending accounts linked to fraudulent activities to detect and prevent market manipulation.^[6]

Biggest P&Ds in Crypto

Shiba Inu

The SHIB token at the end of 2020 was priced at 0.000077 millionths of a dollar, but, later on, it went over 36 millionths. This is an increase of more than 45,000,000%, even though trading volumes were practically insignificant at the end of 2020. The real boom came in early May when it went from 1.5 millionths to 35.3 millionths in the space of three days.

Gala

Gala, instead, in a span of few months, gained 177.000%, even if the real boom was only in November when it went from 0,084$ to 0,72$, almost tenfold its value in less than two weeks.

Terra (LUNA)

Terra (LUNA) experienced the most remarkable rise, boasting an increase of over +18,000%. This surge allowed it to overtake both Polkadot and Dogecoin. At the close of 2020, its price hovered around $0.6, but by March, it had ascended to $22. The most significant surge, however, commenced at the end of July, propelling the token's value from $7 to over $90 within just a few months.^[7]

Legal Cases

Legal cases and regulatory actions related to P&D schemes can vary by jurisdiction and change over time. Historical legal cases related to P&D schemes in the cryptocurrency space:^[8]

Bitconnect

Bitconnect faced legal action in multiple jurisdictions. The promoters behind Bitconnect were sued by investors and faced regulatory actions from authorities in various countries. In the United States, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Bitconnect's promoters, resulting in a cease and financial penalties.

Centra Tech

Centra Tech, a cryptocurrency project that was endorsed by celebrities, including Floyd Mayweather and DJ Khaled, faced legal action from the SEC. The founders of Centra Tech were charged with securities fraud and other violations for their role in promoting an unregistered initial coin offering (ICO).

GAW Miners and ZenMiner

In 2015, the SEC charged Josh Garza, the founder of GAW Miners and ZenMiner, with operating fraudulent Ponzi schemes. Garza was accused of selling investments in cloud-based Bitcoin mining operations that didn't exist.

PlexCoin

The SEC filed an emergency action against PlexCoin in 2017, alleging that its founder, Dominic Lacroix, and his company were operating an unregistered ICO that promised investors unrealistic returns. The SEC obtained a court order to freeze the assets of PlexCoin and its operators.

Manipulative Trading

In various instances, the Commodity Futures Trading Commission (CFTC) and the SEC have taken action against individuals and entities involved in manipulative trading practices, which can include P&D schemes in the cryptocurrency market. These actions typically result in fines and legal penalties.

Laws in Different Countries

Authorities that work to prevent pump-and-dump schemes and other market manipulations are typically financial regulatory agencies. The exact name of the authority varies by country. Here are some of the regulatory authorities from various countries that monitor and take action against pump-and-dump schemes:

USA

United States

• Securities and Exchange Commission (SEC):

Pump and dump schemes involving securities or tokens deemed as securities are subject to federal securities laws. The SEC takes a strict stance against fraudulent activities, including P&D schemes, and can bring civil enforcement actions against individuals and entities involved in such schemes.

• Commodity Futures Trading Commission (CFTC):

If the scheme involves commodities or derivatives, the CFTC may also become involved and bring enforcement actions.

Canada

• Canadian Securities Administrators (CSA):

Canada has provincial and territorial securities regulators that are members of the CSA. P&D schemes that involve securities fall under their jurisdiction. CSA members have the authority to take legal action against individuals or entities involved in fraudulent activities.

United Kingdom

• Financial Conduct Authority (FCA):

The FCA is the regulatory body overseeing financial markets in the UK. It has the authority to investigate and take legal action against those involved in fraudulent schemes, including P&D activities in the cryptocurrency space.

European Union

• European Securities and Markets Authority (ESMA):

ESMA coordinates the regulation of financial markets within the EU. Member states have their own regulatory bodies, and actions against P&D schemes may vary, but EU-wide regulations and directives may apply to protect investors.

Australia

• Australian Securities and Investments Commission (ASIC):

ASIC is Australia's financial regulatory agency. It has the authority to investigate and take legal action against individuals or entities involved in fraudulent activities related to securities and financial products.

Japan

• Financial Services Agency (FSA):

Japan's FSA regulates financial markets, including cryptocurrency exchanges. P&D schemes involving cryptocurrencies may be subject to penalties under Japanese law.

South Korea

• Financial Services Commission (FSC):

South Korea's FSC oversees financial markets, including cryptocurrency exchanges. The FSC has the authority to investigate and take legal action against fraudulent activities, including P&D schemes.

China

• People's Bank of China (PBOC):

China has taken a strict stance against cryptocurrencies and has implemented measures to prevent P&D schemes and other fraudulent activities. Cryptocurrency trading and ICOs have been banned in China.

Government Actions

Governments and regulatory authorities take various actions to combat P&D schemes in the financial markets, including cryptocurrency markets. These actions are designed to protect investors, maintain market integrity, and uphold the rule of law.

Here are some common actions taken by governments and regulators in response to P&D schemes:^[10]

Civil and Criminal Enforcement

Governments may initiate civil or criminal enforcement actions against individuals and entities involved in P&D schemes. These actions can result in fines, penalties, and even imprisonment for those found guilty of fraudulent activities.

Asset Freezing

In cases where P&D perpetrators have profited from their schemes, governments may seek court orders to freeze their assets. This is done to prevent the individuals or entities from dissipating their ill-gotten gains.

Regulatory Warnings and Alerts

Regulatory bodies often issue public warnings and alerts to inform investors about known or suspected P&D schemes. These warnings aim to educate the public and deter participation in fraudulent activities.

Collaboration with International Authorities

P&D schemes can be international in scope, involving perpetrators and victims across borders. Governments may collaborate with foreign regulatory agencies and law enforcement organizations to investigate and prosecute offenders.

Enhanced Regulatory Frameworks

In response to emerging threats like P&D schemes in the cryptocurrency space, governments may enact or amend regulations to provide greater oversight of digital assets and related activities. This can include requirements for registration, reporting, and compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations.

Educational Initiatives

Regulatory authorities often engage in educational efforts to raise awareness about the risks associated with P&D schemes and provide guidance on how to avoid falling victim to them.