With the introduction of the European MiCAR legislation (Markets in Crypto-Assets), the regulator will soon have the power to take action against entities attempting to manipulate the crypto market.
This marks the end of an era of largely unchecked practices in the cryptocurrency sector.
Abuse in an Unregulated Market
The cryptocurrency market has remained mostly unregulated, leaving room for fraudsters and manipulators to operate freely. One of the most notorious tactics in this space is the “pump-and-dump” scheme. In this strategy, the value of a cryptocurrency is artificially inflated to lure buyers in, only for the price to plummet once the manipulators sell off their holdings, leaving unsuspecting investors with worthless assets.
How Pump-and-Dump Works
The typical steps of a pump-and-dump scheme in the crypto world usually unfold as follows:
- Creating or selecting a coin: Fraudsters either create a new cryptocurrency, allocating large quantities to themselves, or choose an existing coin that’s easy to manipulate due to its low trading volume.
- Generating hype: Using social media, fake press releases, and sometimes paid influencers (or “finfluencers”), they promote the coin, promising incredible returns. This creates a “fear of missing out” (FOMO) among investors, who rush to buy.
- Price surge: As unsuspecting investors buy into the hype, the price of the coin shoots up rapidly due to low liquidity.
- Fraudsters cash out: Once the price reaches a peak, the fraudsters sell off their holdings, taking advantage of the inflated prices.
- Market crash: With no new buyers, the price crashes, and the remaining investors are left with nearly worthless coins.
MiCAR and Crypto Market Oversight
The regulators have previously warned against these manipulative practices, but due to the lack of regulatory authority, it was difficult to take enforcement actions. However, with the new MiCAR regulations, market manipulation tactics like pump-and-dump schemes will be banned across the European crypto market. MiCAR sets clear rules and grants authorities like the Dutch AFM the power to impose penalties and enforce regulations.
According to an AFM spokesperson: “The potential advantages of digital innovations based on crypto can only be realized if there is sustainable confidence in the sector.”
Risks Still Exist
While MiCAR represents a significant step forward in protecting consumers from fraud and market manipulation, trading in cryptocurrencies remains inherently risky. The regulators continue to warn that investors should be cautious and only invest money they are willing to lose. The volatility and still-developing regulatory environment make the crypto market a dangerous space for inexperienced traders.
Even with MiCAR bringing much-needed oversight, the responsibility still lies with investors to remain vigilant and thoroughly research the risks associated with cryptocurrencies.
Additional Protections and Global Impact
MiCAR is expected to play a key role in setting a precedent for crypto regulation not just in Europe but worldwide. As governments and regulators across the globe face increasing pressure to regulate the volatile and speculative crypto space, Europe’s regulatory framework could serve as a model. Other countries, particularly in North America and Asia, are observing closely as they work on their own versions of crypto regulations.
MiCAR’s introduction is not just about pump-and-dump schemes but also addresses broader market manipulations, insider trading, and the transparency of issuers and exchanges. These measures are designed to create a fairer market where all participants, from individual investors to institutional players, operate on a level playing field.
The implementation of MiCAR marks a pivotal moment for the cryptocurrency industry in Europe, aiming to curb manipulation and instill greater investor confidence. While the crypto market will remain risky and volatile, the introduction of stricter oversight and the prohibition of fraudulent schemes like pump-and-dump can create a safer environment for traders. However, consumers must remain cautious and informed, as no regulation can fully eliminate the risks inherent to investing in cryptocurrencies.
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