FBI’s cryptocurrency ‘Trap Token’ released

FBI’s cryptocurrency trap, what is NexFundAI?

NexFundAI, introduced by the US FBI in May 2024, is an Ethereum-based crypto token created as part of the covert operation Operation Token Mirrors.

The NexFundAI token is designed to act as a bait to target individuals and organizations involved in fraudulent cryptocurrency activity, particularly pump and dump schemes. In these scams, manipulators artificially inflate the value of tokens to attract unsuspecting investors, then dump their holdings when the price peaks, causing losses to investors.

NexFundAI mimics the look and behavior of legitimate cryptocurrencies, allowing the US Federal Bureau of Investigation to lure market manipulators. Scammers were lured into using the tokens to perform illegal activities such as wash trading, where the same party carries out multiple transactions to create a false impression of trading volume. This tactic inflates the value of the token and tricks investors into thinking demand is growing.

Ultimately, NexFundAI helped the FBI gather hard evidence against 18 implicated companies and individuals, such as Gotbit and ZM Quant, who were involved in orchestrating bogus transactions for more than 60 cryptocurrency tokens. By July 2024, the FBI had built a case strong enough to bring charges and arrested key figures involved in the scheme.

Did you know? The NexFundAI attack led to the seizure of over $25 million in assets, and the investigation revealed new methods being used by fraudsters to manipulate cryptocurrency markets.

Evolution of Cryptocurrency Attack Operations

Cryptocurrency attack operations have moved from traditional physical settings to sophisticated digital attacks since the advent of Bitcoin in the early 2010s, with the FBI leveraging blockchain monitoring and targeting scams such as Silk Road, Ponzi schemes, and initial coin offerings (ICOs). It has evolved.

In the early days of financial crime crackdowns, agents would pose as buyers, investors, or intermediaries to commit criminal acts, often involving wire transfers or cash. As technology has advanced and cybercrime has emerged, the focus of hacking operations has shifted from physical cash to digital assets.

This shift began in earnest in the early 2010s with the emergence of Bitcoin, which introduced a new form of untraceable, decentralized digital currency. Criminals have quickly adopted cryptocurrencies for money laundering, fraud, and hacking.

The FBI responded in 2013 with its first large-scale cryptocurrency investigation targeting online black markets like Silk Road that relied on Bitcoin (BTC) for illicit transactions. These early efforts demonstrated the potential of digital crime, allowing law enforcement to monitor blockchain transactions in real time.

As cryptocurrency crimes increase, the scope of entrapment operations also increases. One notable example was Operation Phish Phry, which targeted online hackers in the late 2000s.

However, it wasn’t until the 2010s that law enforcement began to focus more on cryptocurrency scams, such as Ponzi schemes and hacking rings. In 2018, Operation Cryptosweep launched a major effort targeting more than 200 ICO scams that defrauded investors around the world. Law enforcement agencies in the United States and Canada have teamed up to crack down on fraudulent ICOs and recover millions of dollars in stolen funds.

Likewise, the FBI’s involvement in uncovering Ponzi schemes such as the Bitconnect scam in 2018 demonstrated how digital attacks can expose major cryptocurrency crimes.

Did you know? One of the biggest digital attacks in the cryptocurrency world was Operation Silk Road, which targeted the illegal online marketplace Silk Road in 2013. The operation resulted in the arrest of site founder Ross Ulbricht and the seizure of millions of dollars in Bitcoin. .

How the FBI used NexFundAI to uncover cryptocurrency fraud

The seemingly legitimate NexFundAI token, with its website, branding and token economics, has attracted the attention of market manipulators, including companies specializing in wash trading and pump-and-dump schemes.

NexFundAI is set up as a regular Ethereum-based token, with a website, branding, and token economics no different from a legitimate cryptocurrency project. The FBI ensured that NexFundAI had all the ingredients needed to attract the attention of manipulators: a strong online presence, an attractive outlook, and, most importantly, legitimacy. By creating the appearance of authenticity, the FBI was able to fool market makers into thinking that these tokens had the potential to make huge profits.

To further strengthen the bait, the FBI teamed up with a market-making company that specialized in price manipulation. These companies often conduct wash trading and pump-and-dump schemes to artificially inflate token prices. NexFundAI provided an ideal playground for these manipulators to demonstrate their fraudulent tactics under the close watch of law enforcement.

By mimicking how real cryptocurrency projects operate, the FBI has effectively created a “honey pot” to lure these companies into committing fraud without realizing they are being watched.

Once market manipulators began interacting with NexFundAI, the FBI was able to gather evidence in real time. As mentioned, companies like Gotbit and ZM Quant, which have a history of inflating trading volumes through fake transactions, were caught in the act like flies in a honeypot.

Additionally, on-chain data shows that the wallet that once raked in more than $11 million by manipulating SAITAMA funded NexFundAI distributors with just 0.01 Ether (ETH). The wallet spent $7,300 to buy $875.8 trillion of SAITAMA, sold $687.66 trillion of SAITAMA for $8.85 million, and deposited $737 trillion ($2.75 million) to OKX and Gate.io. . And after buying it back with $253,000, this single wallet netted a profit of over $11 million from SAITAMA.

Wash trading, which creates the illusion of liquidity by trading between accounts managed by the same party, was one of the major fraudulent activities observed. These trades mislead investors into thinking there is high demand for the tokens, driving the price up before manipulators dump their holdings for a profit.

The FBI closely tracked the trading activity of the tokens and recorded fraudulent transactions, resulting in hard evidence of manipulation. This is not just limited to market activity. The FBI also collected digital communications, contracts and payment records from the companies involved.

This operation revealed just how organized this fraud was. In addition to wash trading, the FBI identified price manipulation techniques, including intentionally timing large purchases and sales to influence market sentiment. The FBI not only observed fraud through NexFundAI, but also directly participated in the market-making process and recorded the fraudsters’ every move.

Did you know? As reported by the Blockchain Transparency Project, one of the largest laundering transactions in history involved BitForex, which found that 95% of its trading volume in 2019 was attributed to laundering transactions. This type of artificial volume manipulation has affected billions of dollars in trading, misleading investors about actual market demand.

NexFundAI: Fighting fire with fire

NexFundAI has proven to be a successful tactic in the fight against cryptocurrency fraud, exposing malicious actors.

By creating its own token, the FBI was able to gain a unique insider’s perspective by observing fraudulent activity within the very systems criminals were trying to exploit. Instead of simply tracking transactions from the outside, as its previous work had done, the FBI has become a player in the cryptocurrency world.

The success of Operation Token Mirrors could have long-term implications for how law enforcement operates in the cryptocurrency space. This operation demonstrated that creating secret tokens and projects can be a powerful tool in unmasking cryptocurrency criminals. As fraudsters become more sophisticated, operations like this provide a way to directly infiltrate their plans rather than simply monitor them from the sidelines.

This strategy may make fraudsters and market manipulators more cautious in the future as it is no longer known if the tokens they are manipulating are part of an FBI attack. This adds a new layer of unpredictability to the already volatile cryptocurrency market. Fraudsters may be hesitant to engage in blatant market manipulation knowing that law enforcement agencies may monitor their activities and even participate in them.

Additionally, this action sets a precedent for future digital attacks. Law enforcement agencies around the world could adopt a similar strategy, creating their own tokens to track criminal activity. This kind of proactive approach signals a new era in cryptocurrency enforcement, where fraud detection focuses on participation rather than passive observation.

How to find trap tokens

If something seems odd – unrealistic promises, hidden team members, unexplained market activity – it’s worth reconsidering getting involved. NexFundAI proves that even the most legitimate-looking tokens can be traps designed to take advantage of unsuspecting investors.

Spotting trap tokens is important because they are often designed to attract investment through a pump-and-dump approach. These tokens may appear to represent legitimate projects and are sometimes backed by large investments or sudden price spikes, making you want to invest quickly.

Of course, law enforcement agencies use trap tokens like NexFundAI to catch malicious actors rather than actual investors. However, whether it’s a trap token created by law enforcement or a scam set up by malicious actors, falling for these schemes can result in huge losses. If you don’t spot the warning signs in time, you risk losing your entire investment.

Here are some common red flags to look out for:

• Sudden price surge without clear fundamentals: One of the most obvious signs of a potential scam or trap token is a rapid price rise without any real news or project developments to support the rise. Pump and dump schemes often follow this pattern, with manipulators selling off their holdings and driving up prices to lure investors before crashing the market. If the value of a token skyrockets overnight for no apparent reason, this is a red flag.
• High trading volume and low liquidity: Another tell-tale sign is when a token’s trading volume is unusually high, but its liquidity (the ease with which the asset can be bought and sold) is still low. This may represent wash trading, where tokens are repeatedly bought and sold by the same entity to create the illusion of activity. If your tokens seem difficult to trade or withdraw, this is another warning sign.
• Existence of wash sales: Look for patterns that suggest wash trading, such as multiple trades occurring in rapid succession or very small price changes between trades. Wash sales artificially increase demand, misleading investors into thinking there is more interest in the token than there actually is. Tools such as blockchain explorers or specialized sites that track suspicious transaction activity can help uncover these patterns.
• Lack of transparency: Be wary of projects that aren’t honest about their team, technology, or development goals. Fraudulent tokens often hide behind anonymity or vague promises. Legitimate projects usually have a clear and transparent roadmap, an active developer community, and an accessible team.

Lastly, before investing in any token, check regulatory alerts and check the legality of the project. Agencies such as the U.S. Securities and Exchange Commission (SEC) or their counterparts in other countries often alert us to known frauds and fraudulent projects. These advisories are designed to protect investors from engaging in shady businesses. You can also use public tools and databases, such as the SEC’s EDGAR database, to determine if a token has been flagged as fraudulent or involved in a legal dispute.