Ethics Case Study of the Week: Crypto Market Manipulation

By Gary Sarkissian posted 08-16-2021 08:00


CFA Institute’s Code of Ethics and Standards of Professional Conduct codify the ethical guidelines for the investment profession that are critical to maintaining the integrity of capital markets and investor trust.  Members, candidates, and even firms make a commitment to uphold these standards as they help elevate ethical decision-making universally around the globe.  

As investment professionals, we are certain to face important ethical decisions in our day-to-day activities.  Some scenarios we encounter will be straightforward, while others may be more complex.  No matter what circumstances we face, continuous learning remains imperative in an investment industry that continues to evolve with products undergoing innovation and a regulatory environment continuing to adapt. 

For that reason, each week we feature a sample case from CFA Institute’s Ethics in Practice Casebook.  Many cases are built upon real-life examples that may involve a regulatory matter or even a CFA Institute Professional Conduct investigation.  At the end of each case is a multiple-choice question that addresses the ethical nature of the actions taken in that case.  

This week’s case involves Standard II(B) Market Manipulation.

Crypto Market Manipulation
Santos trades digital coins on cryptocurrency exchanges for both his own account and as an
investment strategy for clients who have indicated an interest in such speculative trading and for whom it is appropriate. The cryptocurrency exchanges are unregulated markets. Santos is a member of “EasyCoin,” a chatroom in which coin traders gather that has thousands of members. EasyCoin is a private chatroom accessible by invitation only and is overseen by an anonymous moderator. Generally, the chatroom moderator announces a date, time, and exchange for members to initiate trading. At the set time, the moderator informs the chatroom of the particular cryptocurrency to be traded. Traders, including Santos, buy that digital coin creating a surge in the price with the intention of attempting to sell before the price collapses. Over the past several months, 47 different cryptocurrencies have been promoted on EasyCoin and generated $357 million in trades. Santos often profits from the rise in the price of the cryptocurrency by timing his trades correctly, but occasionally he buys and holds the digital coin too long and the price drops steeply before he can sell, causing him to lose money for himself and his clients. Santos actions are

A. acceptable because Santos, unlike the moderator of the EasyCoin chatroom, is not actively organizing the trading of the digital coin.
B. unacceptable because Santos is engaged in market manipulation.
C. acceptable because he voluntarily engages in this speculative trading based on information in a private chatroom.
D. unacceptable because speculative trading cryptocurrency in unregulated markets for client accounts is unethical

What do you think is the correct choice?  Click the “Analysis” button below to see the analysis for this case, and feel free to discuss in the comments below.  The completion of this case qualifies for 0.25 hour of Standards, Ethics, and Regulation (SER) credit


The facts of this case are addressed by CFA Institute Standard II(B): Market Manipulation, which states that CFA Institute members must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants. In this case, Santos, at the direction of the moderator in the EasyCoin chatroom, engages in trading with the intent to give the impression of price movement in a financial instrument. The fact that the financial instrument is a cryptocurrency trading in an unregulated market and not a conventional security trading in a public market does not affect the applicability of the standard. Although Santos is not organizing the run-up of the price for digital coin, his actions in trading the coin at the behest of the EasyCoin chatroom moderator at a particular time and on a particular market make Santos a participant in the manipulation scheme. Trading in speculative investments on behalf of himself or his clients is acceptable if appropriate and warranted by clients’ financial circumstances and risk tolerance. But engaging in fraud on the market through market manipulation is a violation of Standard II(B). The best answer is B.

This case is based on a story in the 6 August 2018 issue of the Wall Street Journal.

Image by Sergei Tokmakov from Pixabay

© 2019 CFA Institute. All rights reserved. You may copy and distribute this content, without modification and for non-commercial purposes, provided you attribute the content to CFA Institute and retain this copyright notice.  This case was written as a basis for discussion and is not prescriptive of how a business situation or professional conduct matter should or should not be handled or addressed. Certain characters mentioned are fictional to facilitate discussion, and any resemblance to actual persons is coincidental.

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