How insider trading harms daily crypto investors

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Do we need regulation to prevent insider trading in crypto?

Important points

• The Ministry of Justice has taken out its first allegations of insider trading in digital assets, and accused a former OpenSea employee of profiting from confidential information.
• There are also reports that the SEC has also launched an investigation into insider trading in cryptocurrency exchanges.
• Insider trading erodes investor confidence and creates uneven competition.

The Department of Justice recently accused an OpenSea leader of insider trading, the first case in digital assets ever. Meanwhile, the SEC has reportedly launched a study on how insider trading is handled on crypto exchanges. As insider trading in the world of cryptocurrency comes under the spotlight, we take a look at what it is and how it affects crypto investors.

What is insider trading?

Insider trading is where a person makes trades based on confidential information. For example, you might be working for a company that is about to announce a major merger or disappointing annual result. If you buy or sell stocks because of this information, it is insider trading and you may be prosecuted.

In equity investments, there are rules and processes for stopping insider trading. This is especially true for companies registered with the SEC, as they have systems in place to prevent it. Companies can appoint compliance officers, create training programs and introduce blackout periods to limit trading around important events. Even then, it has not been completely stamped out.

How does insider trading affect crypto?

In the world of cryptocurrency, there are fewer established systems and processes. In addition, most cryptocurrencies are not classified as investments that must comply with SEC rules. But it seems that rules for insider trading do not only apply to SEC-registered assets. And ignorance of the law is no defense.

In early June, the Ministry of Justice announced that they would prosecute OpenSea’s Nathaniel Chastain. It is alleged that Chastain, who was responsible for selecting which NFTs to display on the platform’s website, secretly purchased some of these items in advance. He then earned when prices increased. OpenSea is one of the largest NFT marketplaces in the world.

U.S. Attorney Damian Williams said: “NFTs may be new, but this type of criminal scheme is not. As alleged, Nathaniel Chastain betrayed OpenSea by using its confidential business information to make money for himself. stamp out insider trading – whether it happens on the stock market or the blockchain. ”

Another area that is being investigated is people who buy cryptocurrencies shortly before they are listed on large crypto exchanges. Since prices often increase after announcements of new listings, this can be a quick way to earn for those who know in advance. Fox News recently reported that the SEC has written to several stock exchanges asking for more information. If the authorities can prove that stock exchange employees trade based on non-public listing information, we may see additional insider trading fees for digital assets.

How insider trading harms crypto investors

There is a reason why the SEC is cracking down hard on insider trading in the stock market: It creates uneven playing field and can hurt ordinary investors. Fundamentally, insider trading erodes confidence in the crypto and NFT markets. This means that when you buy crypto or an NFT, you can not be sure that the price is not already pushed up by someone who unfairly knows something you do not know.

Crypto exchanges say they have systems in place to stop employees from profiting from confidential information, but it is not clear how strict they are or how deep the problem runs. For example, The Wall Street Journal published details of an analysis of Argus, a crypto-compliance company. It showed that 46 different crypto wallets had bought one particular token shortly before it was listed on different exchanges. The trades generated over $ 1.7 million in profits, and that is from just one token listing.

The challenge is that there is so little in the way of crypto-regulation, so crypto-investors are dependent on individual companies mainly regulating themselves. This means trusting, for example, the senior team on a crypto project so as not to buy or sell the coin or token before a major announcement. Or hope that employees at the crypto exchange will not seek to profit from prior knowledge of, for example, a new listing.

However, this may not be enough. There is a good chance that additional investor protection and insider trading controls will be part of further cryptocurrency regulation in the United States. Following President Biden’s executive order, a new regulatory framework is in the pipeline, and much depends on how strict the new rules will be. .

The bottom line

Authorities such as the DoJ and the SEC do not want to wait for new regulations, especially if they can use existing rules to prosecute unethical behavior. In the OpenSea case, the DoJ is suing Chastain for electronic fraud and money laundering, not specifically insider trading. Several industry insiders believe the OpenSea case is the tip of the iceberg and that the DoJs case is just the beginning. In addition to increased regulatory controls, we may also see further enforcement action in the coming months.