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Cryptocurrency and market manipulation

Author: Syedur Rahman  25 January 2023
5 min read

Syed Rahman of Rahman Ravelli assesses the potential for market abuse by cryptocurrency exchanges and the approaches taken so far in the UK, European Union and US.

Cryptocurrencies have sparked plenty of debate in recent years. Much of this has been focused on either the value of them or their regulation. Yet the issue of market manipulation needs to be examined, particularly the conduct of cryptocurrency exchanges.

The late 2022 collapse of FTX has put crypto and market abuse firmly in the spotlight. At one point in its three-year existence it had been the third-largest cryptocurrency exchange by volume in the world. Now, FTX founder and CEO Sam Bankman-Fried is charged with offences including conspiracy to commit commodities fraud and securities fraud, and conspiracy to defraud the United States and commit campaign finance violations. The charges stem from allegations that Bankman-Fried defrauded investors out of $1.8 billion (£1.5 billion). FTX has been in Chapter 11 bankruptcy proceedings in the US since last November.

The large-scale, high-profile nature of FTX’s collapse has led to many questioning how crypto exchanges function and the risk of market manipulation - the attempt to artificially affect the price of an asset and / or the behaviour of markets. Market manipulation is certainly not unique to crypto exchanges. It is an illegal practice that has gone on for centuries. But Deloitte, in its 2021 report “Market Manipulation in Digital Assets’’ pointed out that market capitalisation for cryptocurrency had hit $1 trillion two years ago. It warned that up to 90% of trading could be vulnerable to market manipulation1.

Market Manipulation Risk

The distributed ledger technology (DLT) involved in crypto trading allows for data to be distributed and synchronised. But it does not prevent market manipulation. There are a number of respected and well-regulated exchanges in the cryptocurrency sector. But there are many small exchanges that are less well known and less regulated. There are also many who are looking to use cryptocurrency as a vehicle for wrongdoing.

Market manipulation is one way in which crypto can be used to make illegal gains. Such manipulation can be carried out in a number of ways. Some employ tactics that have been used in more traditional asset markets while others are unique to cryptocurrency.

The most popular are:

  • Pump and dump: This is the artificial inflation of the price of an asset and is a practice that has been conducted for many years on various markets. It involves a series of sales and purchases of a cryptocurrency to create the impression that the asset is increasing in value. Those behind this then sell the asset when their artificial rising of the price attracts buyers who have been duped into believing that the cryptocurrency in question is set to keep rising in value. Learn more about pump and dump trading.
  • Whale wall spoofing and stop hunting: The practice of whale wall spoofing was often used when Bitcoin was in its infancy. It is now most often used on the less well-regulated exchanges. It involves an individual or organisation (“a whale”) placing a large order so that fake buy or sell walls are created in the order books, which can trick other parties into panic selling (as they fear a particular asset is losing value) or rushing to buy (as they believe huge demand for an asset is pushing its value up). For example, a whale may set large sell orders which in turn tricks investors into panic selling. In stop hunting, a whale drives the price to where set stop-loss orders – which are designed to limit an investor's loss if an asset falls in value – are triggered. The resulting market volatility enables assets to be bought at a lower price.
  • Wash trading: This is similar to whale wall spoofing and involves misleading information being introduced to the market to prompt rapid buying and selling of an asset to distort the price to an artificially high level. For small exchanges, this can increase their number of users and, in turn, the commission they earn. Learn more about wash trading.
  • Disseminating false information: False information is often spread to traders or investors on forums in an attempt to provoke a change in the market that those doing the spreading wish to see.

Claiming Market Abuse – the UK and Europe

In the UK, market abuse is covered by the Criminal Justice Act 1993 (CJA) and the UK Market Abuse Regulation (UK MAR). Any claim would depend on the cryptocurrency meeting the definition of a security2.

The Financial Conduct Authority’s FCA PS19/22: Guidance on Cryptoassets states that cryptocurrencies can be regarded as a security token3. This could be taken to mean that such an asset could be considered a debt security under the CJA - and if it was negotiable on the capital market it would constitute a transferable security and, therefore, meet the UK MAR definition of a security. Both of these outcomes would mean there were grounds for a claim for market abuse. But as cryptocurrencies are often traded across borders on platforms in various jurisdictions – and at great speed - the issue of enforcement can be problematic.

In 2022, the European Parliament approved the Markets in CryptoAssets (MiCA) regulation, which is likely to have a notable effect on the crypto market when it comes into force in 2024. Under MiCA, cryptocurrencies are divided into four categories:  cryptoassets, utility tokens, asset-referenced tokens and electronic money tokens (e-money). They will be regulated in accordance with their classification. Any cryptocurrency that is traded on a cryptoasset trading platform operated by a cryptoasset service provider would be subject to the MiCA market abuse regime, which includes requirements regarding disclosure of inside information, prohibiting of insider dealing, unlawful disclosures and market manipulation. It remains to be seen if the UK takes steps to adopt a similar approach.

Claiming Market Abuse – the US

In the US, the situation regarding classification of cryptocurrencies is multifaceted. While the Internal Revenue Service (IRS) classes them as property, the Securities and Exchange Commission (SEC) treats them as securities, while the Commodity Futures Trading Commission (CFTC) views them as commodities. The Digital Commodity Exchange Act of 2022 was introduced to regulate trading venues and oversight is provided through state money transfer laws.

But the US is like the UK, in that there is no centralised cryptocurrency regulation. Yet the US Department of Justice (DOJ) and the SEC have brought their first insider trading case involving cryptocurrencies. The case saw Nikhil Wahi, brother of a former product manager at CoinBase Global, sentenced to 10 months in prison in January 2023 for trading using misappropriated information about cryptoasset listings on an exchange. The SEC had argued that nine of the cryptoassets involved met the definition of securities under federal securities law, which enabled it to bring the action for insider trading. The case can be seen as an indicator that the US authorities can and will bring civil claims and criminal charges when market abuse is suspected in relation to cryptocurrencies.


The developments so far in relation to the policing of cryptocurrencies are a reflection of the need to tackle the sharp practices and resulting volatility in the crypto markets. These developments have not – so far, at least – have moved as swiftly as events in the markets they relate to. But they represent an ongoing attempt to both reduce the scope for crypto-related market manipulation and hold to account its perpetrators.


1. Deloit  Market Manipulation in Digital Assets


2. Markets in crypto-assets (MiCA) Briefing 29-11-2022 https://www.europarl.europa.eu/thinktank/en/document/EPRS_BRI(2022)739221.

3. PS19/22 Financial Conduct Authority Guidance on Cryptoassets Feedback and Final Guidance to CP 19/3 July 2019 https://www.fca.org.uk/publication/policy/ps19-22.pdf.

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Syedur Rahman is known for his in-depth experience of serious fraud, white-collar crime and serious crime cases, as well as his expertise in worldwide asset tracing and recovery, international arbitration, civil recovery, cryptocurrency and high-stakes commercial disputes.

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