The Dutch Authority for the Financial Markets (AFM) warned about the risks of cryptocurrency pump-and-dump schemes ahead of upcoming regulation.

According to an official AFM press release, the Markets in Crypto-Assets Regulation (MiCA) will come into effect on Dec. 30.

Under MiCA, market manipulation practices like pump-and-dump schemes will be explicitly prohibited in the European Union.

The AFM will supervise and enforce the new regulations in the Netherlands.

Related: Kraken acquires Dutch broker BCM as part of European expansion

MiCA implications

MiCA aims to increase transparency and market integrity in the crypto sector by prohibiting manipulative practices like pump-and-dump schemes. 

“The Markets in Crypto-Assets Regulation (MiCAR) is designed to elevate the crypto sector’s maturity and enhance investor protection. However, MiCAR will not eliminate all risks in the crypto sector.”

In preparation for MiCA, the AFM has investigated several cases of pump-and-dump schemes in recent months and intends to set a precedent for strict enforcement once MiCA takes effect.

Related: One Trading receives Dutch license, onshores EU crypto futures

How pump-and-dump schemes work

A pump-and-dump scheme is a tactic used to artificially inflate the price of an asset, such as a cryptocurrency, by spreading misleading or exaggerated information, often through social media.

Promoters buy a large amount of the pump-and-dump scheme crypto asset at a low price and hype it up using promotional phrases to encourage public participation at higher prices.

Once the price is inflated, the scheme’s organizers sell their holdings of the asset (dump it), making significant gains at the expense of leaving investors with devalued holdings.

Hanzo van Beusekom, a member of the AFM’s executive board, stated that pump-and-dump schemes “undermine trust” in the crypto market, which is “essential for the long-term potential of digital assets.”

Related: OKX expands to the Netherlands with new crypto exchange and wallet

MiCA threat of crypto consolidation

The AFM’s alignment with Europe’s upcoming MiCA regulation is no surprise, but the regulatory framework could cause an exodus of Web3 firms to the Middle East.

In an interview with Cointelegraph, Anastasija Plotnikova, CEO and co-founder of Fideum, said that it could lead to crypto firms moving “somewhere to the Middle East.”

Plotnikova raised centralization concerns, explaining that the regulation would “lead to a lot of consolidation” and make the Web3 industry more akin to traditional finance.

Magazine: Worldcoin fined again! Crypto store clerk runs off with $500K cash: Asia Express