A quarter of new crypto tokens were pump-and-dump schemes in 2022, report says, highlighting regulatory hurdles

Nearly 10,000 tokens issued last year saw significant price declines in their first week, an indication of fraudulent activity, according to Chainalysis

Regulators in Hong Kong, the US and elsewhere are grappling with how to protect consumers while allowing crypto investment in the wake of the FTX bankruptcy

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More than 24 per cent of new cryptocurrency tokens issued last year saw prices fall in their first week, suggesting fraudulent activity, according to Chainalysis. Photo: Shutterstock

Published: 9:00pm, 16 Feb 2023

More than 24 per cent of new cryptocurrency tokens issued last year were involved in so-called pump-and-dump scams that trick investors into buying at inflated prices, according to a new report, highlighting the challenges that remain in protecting consumers as regulators around the world intensify their oversight of digital assets.

Out of 40,521 new tokens that gained traction last year, 9,902 saw significant price declines within their first week, a sign of pump-and-dump activity, according to the report published on Thursday by crypto research firm Chainalysis. Creators of the newly minted tokens netted US$30 million in profit last year, the report said.

In pump-and-dump schemes, fraudsters artificially boost the popularity and price of an asset before selling their holdings, at which point prices plunge, costing other buyers potentially significant sums of money. Such schemes are illegal in all types of securities, but it has become prevalent in the crypto industry because the assets can often be traded anonymously.

Given the global nature of these blockchains, crypto scams have become a rising concern for regulators around the world. Last year, some Hong Kong investors fell for a similar scheme referred to as a “rug pull”, when non-fungible token (NFT) projects disappeared after heavily promoted launches.

In one example from the Chainalysis report, a creator launched a token on a decentralised exchange (DEX) after promoting the launch to crypto enthusiasts on social media. “Hundreds of victims” bought the token on the DEX, which has no controlling authority to reverse transactions, allowing the price to rise quickly in a matter of hours. The creator sold all his tokens on the same day.

High-profile controversies and scandals in the industry – most notably last November’s bankruptcy of FTX, once the world’s second largest crypto exchange – have led to intensified regulatory action in recent months.

US banking regulators including the Federal Reserve, Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency in January warned that risks posed by crypto assets should not be allowed to spread to the broader financial system.