In a recent development, the Dutch Authority for the Financial Markets (AFM) warned about investors being defrauded through pump-and-dump schemes in cryptocurrency. These manipulative practices will be formally prohibited by the Markets in Crypto-Assets Regulation (MiCAR) which should come into force on December 30, 2024.
AFM's Warning
The AFM brought attention to pump-and-dump schemes, a form of market manipulation where organizers manipulate the price of a cryptocurrency by posting false information, often on social media. As a result, selected assets skyrocket in price, after which they are sold off, causing large losses for other investors when the price drops.
How Pump-and-Dump Schemes Work
As mentioned by the AFM, these schemes create an illusion of value for the selected cryptocurrency. When activity reaches sufficient levels, the organizers let the prices soar and then sell off assets, making significant profits at the expense of regular users who incur losses when the 'bubble' bursts. The AFM conducted investigations identifying certain manipulation patterns via social media activity and price manipulation.
Combating Market Manipulation
The new MiCAR regulation, to be introduced in the future, is expected to help improve investor protection and enhance market transparency. While the AFM has welcomed this regulation, it noted that MiCAR alone will not eliminate all risks of cryptocurrency trading. The regulator also pointed out that trading in cryptocurrencies remains high-risk, and consumers should exercise caution, invest wisely, and avoid making hasty investment decisions. The AFM underscores the existing risks in the crypto market while MiCAR is yet to be fully implemented.
The AFM's warning highlights a significant issue of market manipulation in the cryptocurrency sector. The future introduction of the MiCAR regulation is expected to better protect investors and improve market transparency.
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