convictions such as that of SamBankman-Fried, the two questions are closely related. The unregulated nature of cryptocurrencies means that actions that are blatantly illegal in regular securities markets have a weaker legal proscription in cryptocurrency markets, and some people take advantage of it. That creates a problem for those who want to keep such markets healthy and make use of the currencies.
How they deal with this problem was the question studied by Bryan Spencer and Claus Rerup in research published in Administrative ScienceQuarterly. They examined a crypto-investment community that was hit by a series
of fraudulent promotions by a group of actors who coordinated with each other
to execute classic “pump-and-dump” schemes of minor cryptocurrencies. The
problem, of course, was that the world of cryptocurrency movements and the
world of online news are both ambiguous, so detecting coordinated fraud is
difficult.
A major reason the researchers could detect that fraud was happening and
that the investors were – after a while – becoming aware of this was that the
researchers had access to the database containing public and group chats about
the cryptocurrencies, which included the conversations among the fraudsters
that were kept hidden from the other crypto-investors.
So, what did the investors do? Over time, they learnt. But they followed
a path of nontraditional learning based on learning by making inferences from
interpreting cues. They would question the intent behind the appearance of
innocent-looking information (such as false analyst reports) supporting a
currency. They would look for similarity between new information releases and
earlier fraud cases. They would infer the intent behind the release of
information even when they did not know who was behind the information release.
And once they had made enough interpretation and inference, they would have
stories ready about the true nature of the unfolding events and would be able
to act in response. They acted by more systematically monitoring releases of
information and by routinizing public responses to information releases that
looked suspicious, so that other investors would become aware of the price
pumping and could avoid entering.
In all, this article is a very interesting report on how a community can
act to protect itself in the face of ambiguous information and repeated fraud
attempts. But also, it is a reminder of why markets are regulated and why
financial markets are regulated especially strictly. After all, the lengthy
penalty of Sam Bankman-Fried was based on wrongdoing not in the cryptocurrency
operations, but in regular and regulated financial markets.
