This research paper explores a specific financial market’s phenomenon of fraud. Increasingly, from what is known, it appears that financial fraud no longer takes place in fringes of the activities of financial markets. Financial fraud is now a widespread behavior that knows no frontier in the industry. Since the aftermath of the 2007-2008 financial crises, the industry has been affected negatively by the occurance of substantial scandals (Baum, 2018). These scandals show how the financial markets participants were able to taint this market fraudulently by using the information to help them gain economic advantage. Despite the availability of empirical implications that accompany media in offering observable evidence of this fraudulent trend, academic research in financial markets has been abortive to account for this trend. Thus, as in efforts to provide an essential preliminary step to bringing this fraudulent trend closer to the financial market centers, this research describes the impact of fraud on a world payment system named Cryptocurrency. The study will utilize trade data to explain the impact of fraud on this financial system.
Background of the research/problem
It all began in the 1920s when Charles Ponzi managed to dupe the investors. Charles convinced them he would return 50 percent revenue, at a period of 90 days if they invest in his company (Baum, 2018). Currently, the situation where an investor receives 50 % of the revenue every 90 days is known as the Ponzi scheme. Even so, virtual currencies are characterized by a lack of regulation in the trade market. As a result, a lack of control has enhanced trading privacy. In this manner, the currencies are an easier target by fraudsters considering that the hoaxers find it easier to disseminate the deception in the Ponzi way. In 2017, the Cryptocurrency system came up with a fraud scheme. Through its new coin named BitConnect, the company convinced the investors that they would receive returns of up to 40%, calculated on their initial investment each month. After earning the right amount of investments from the investors, the company exchanged its platform, and the investors lost all their money.
Today, more companies such as NEOConnect, Bunny, XRPConnect, and EthConnect, among others, are replicating the cryptocurrency frauds (Sleiman, Lauf, Yampolskiy, 2016). The above shows that fraud is a new normal, among some companies trading virtual money online.
There is an impact on this. For stance, when such fraud occurs, crypto-currencies can easily over-inflate in terms of pricing. The over-inflation occurs quickly through manipulation of the price artificially by marketing it with impracticable expectations. In the event it happens, people will start buying the coins, and amid delays, they sell the some to buyers and obtain profit through Peer-to-Peer system or exchanges. The platform puts more coins in the market in a process known as mining. During this process, the players will continue exploiting the price. At the same time, people will be aversely investing coins, which at their liberty will abuse the entire process by incrementing their exchange rate by a substantial margin. The users can also change the coins they are having into another currency, such as USD, and in the event, get the liberty to evaluate the customers’ coin. In this context, they become managers who will not give back the money.
It is also important to note that in Cryptocurrency, the aspect of leveraging the price is not as hard as it is in other stocks. The article written in the Journal of Monetary Economics argues that the inevitable spike in terms of 2013’s Bitcoin price occurred due to the activities at the exchange point, called Mt. GOX Bitcoin exchange of currency. Here, 600000 BTC, which had a value of 188 USD million, would be acquired by bots and inflate prices artificially without any real substance. From the above excerpt, it is agreeable that the Cryptocurrency is a system that permits investors to manage the system fraudulently.
The abuse adheres to ways that augment the steady growth of the price, without having to comply with a type of repercussion. There is no proper governmental regulation to control such issues. Thus, the lack of government legislation makes this investment an easier target for most investors, who are out to engage in frauds.