As a seasoned analyst with over two decades of experience in the financial markets, I’ve seen my fair share of market manipulations and shady business practices. The case between Fracture Labs and Jump Crypto is yet another example that highlights the need for transparency and accountability in the crypto space.
In a legal move, the developers at Fracture Labs, responsible for creating the Web3 game titled Decimated, have taken action by filing a lawsuit. The accusation is that market maker Jump Crypto manipulated the game’s internal currency, DIO, in what appears to be a pump-and-dump scheme.
A company named Fracture Labs claims that Jump Crypto colluded with cryptocurrency exchange Huobi (formerly known as “HTX”) to restrict access to $1.4 million of their development funds, refusing to release them back. This allegation was stated in a lawsuit filed on October 15 in the United States District Court for the Northern District of Illinois, Eastern Division.
Fracture Labs is the developer of Decimated, which its website describes as a “post-apocalyptic survival game with elements of cyberpunk.” The game’s currency, DIO, has a market cap of approximately $10 million.
Jump Crypto is the crypto division of Jump Trading Group, a quantitative trading firm. It provides market-making services to crypto exchanges, invests in Web3 startups, conducts research on blockchain technology and develops the Firedancer Solana validator client.
As reported by CoinMarketCap, HTX currently ranks as the 8th largest cryptocurrency trading platform globally, handling more than $1.8 billion worth of transactions every day. Previously known as “Huobi”, it underwent a rebranding process and is now recognized as “HTX” since September.
As stated in the grievance, by the autumn of 2021, Jump Crypto proposed to offer consultation and guidance, connect Fracture Labs with various cryptocurrency trading platforms, and perform market-making duties on its behalf.
In December 2021, Jump consented to offer market-making support for the debut of the game’s token, DIO. Originally, Fracture Labs planned to release the token on the KuCoin platform. However, they decided to launch it on HTX instead, following advice from Jump that suggested this move.
Under the terms of the agreement, Fracture Labs was set to lend 30 million DIO tokens to the subsidiary of Jump Crypto, J Digital. The purpose of this loan was to establish a market for the token, ensuring that traders would always have both buyers and sellers available.
Additionally, the developer consented to transfer $1.5 million into a Tether (USDT) account managed by HTX. This transfer was characterized as a “security deposit,” meant to safeguard HTX from potential market manipulation or pump-and-dump strategies originating from the developer.
The contract outlined specific “trade conditions” that needed to be adhered to during the initial 180 days of business. Complying with these conditions would result in the developer getting their $1.5 million deposit back after half a year. Failure to meet them granted HTX the right to withdraw penalties from the deposit, and afterwards, they would return any remaining amount.
According to reports, Jump Crypto apparently guaranteed Fracture Labs that the price would remain within specified limits and motivated the team to go ahead with the contract signing.
In addition to the agreement, Fracture Labs consented to compensate HTX with a marketing fee valued at $200,000 in USDT and 100,000 DIO. It is claimed that this money was employed to attract online influencers for promoting the DIO token.
On December 29th, the token was introduced and immediately started trading. In its first day, it peaked at a price of $0.98. However, according to allegations, when the price dropped to $0.90, Jump reportedly initiated a large-scale sell-off of borrowed DIO tokens. This sell-off involved approximately 4 million DIO tokens in transactions worth around $2 million. Consequently, the price dropped to $0.53. Over the subsequent month, Jump traded over $6.9 million worth of DIO as the price continued to decrease to $0.26 per coin. The document alleges that they continued selling the token, eventually causing its price to plummet to just $0.0054.
On August 16th and September 21st, 2023, the market maker paid back the borrowed tokens to Fracture Labs in two installments. The price of DIO dropped to $0.006443 on August 16th and $0.005158 on September 21st.
Fracture Labs alleges that Jump Crypto unfairly sold their tokens without any existing demand, causing harm to Fracture Labs. In their view, instead of offering “genuine” market-making services, Jump Crypto carried out a deceptive scheme known as pump-and-dump, aiming to boost the price of their own tokens and subsequently dump them at an inflated cost. This manipulation reportedly led to a decrease in the value of Fracture Labs’ tokens.
Beyond the financial setbacks due to the depreciation of the token, the paper asserts that Jump Crypto bears responsibility for Fracture Labs’ $1.38 million deficit stemming from their account with HTX.
Due to repeated selling of Jump Crypto tokens by them, causing the token’s price to deviate significantly from the set boundaries, HTX imposed penalties nearly equal to the entire deposit amount. This left the developer with only about $350,000 from the original deposit. The rest, approximately $1.38 million, was withheld by HTX and they have yet to release it back to the development team despite requests.
During a chat with CryptoMoon, Stephen Arnold – founder of Fracture Labs – shared that the loss of their deposit had a profound impact on his team. As a result, in November 2022, they were compelled to let go of 30 employees, shrinking the workforce from 55 down to 25. However, even with this setback, the team successfully launched an alpha version of Decimated and are still actively working on its development today.
Arnold argued that his company should not bear responsibility for the changes in the token’s price, since they have no power to manipulate its value. He questioned, “How is this our blame?” This seems unfair, he added, because they are being punished for the funds they invested, when it was actually the market makers who held control over the situation. Moreover, he emphasized that they don’t possess the ability to dictate market conditions.
CrytoMoon reached out to Jump Crypto for their comment, but they didn’t respond before our article went live. The claims made in the document haven’t been validated in court yet, and it’s within Jump Crypto’s rights to take some time to prepare a response to the accusations in the complaint.
In response to the accusations made by the suit, HTX informed CryptoMoon that they are dedicated to adhering strictly to all relevant laws and regulations. Moreover, since this case is currently under litigation, and HTX isn’t among the defendants, they can’t offer any additional comments at present.
It’s often been speculated by some cryptocurrency users that market manipulators might be influencing prices during initial coin offerings or token launches. Yet, those who question these practices have found it challenging to present concrete evidence of such misconduct.
On October 9th, it was announced that the Securities and Exchange Commission (SEC), Federal Bureau of Investigation (FBI), and Department of Justice in the United States have indicted 18 individuals linked to four distinct cryptocurrency market-making companies. These firms are accused of artificially inflating trading volumes and executing pump-and-dump schemes. This marks the first time that U.S. authorities have officially charged crypto market makers for manipulation.
Yet, based on the accusations in the indictments, other companies were alleged to have provided an explicit service of generating falsified trading volumes during their launches. Unlike these firms, the ongoing lawsuit against Jump Crypto does not allege that they offered such a service explicitly.
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2024-10-18 16:45