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Publicly available evidence suggests that insiders through several anonymous crypto wallets have benefited from inside information about when tokens will be placed on exchanges.
Insiders benefit in the cryptocurrency market
Over the course of six days last August, one crypto wallet amassed a share of $360,000 worth of Gnosis coins, a token related to efforts to create a blockchain-based forecasting market. On the seventh day, Binance – the world’s largest cryptocurrency exchange by volume – announced in its blog that it would place Gnosis and allow it to be traded among its users.
Token listings add liquidity to the token and increase their legitimacy in the eyes of users, and often provide an increase in the token’s trading price. The price of Gnosis skyrocketed from $300 to $410 within an hour. Gnosis’s trading turnover on that day rose more than seven times from the seven-day average.
Within four minutes of Binance’s announcement, the wallet began selling its stake, completely liquidating it in just over four hours in just over $500,000, generating a profit of about $140,000 and a return of approximately 40%, according to an analysis conducted. Argus Inc., a firm that offers companies software to manage the trade of employees. The same wallet demonstrated similar token buying patterns prior to their listing and quick sale of at least three other tokens.
The cryptocurrency ecosystem is increasingly facing challenges that the world of traditional finance faced decades ago. The collapse of the so-called stablecoin due to its dollar peg earlier this month was due to a cryptographic version of the banking foray. Questions about how cryptocurrency exchanges prevent the leakage of market-sensitive information is becoming an increasingly serious topic of discussion. Attention to this issue is heightened when regulators raise questions about market equity for retail users, many of whom have just recorded large losses due to the sharp decline in crypto assets.
The wallet that bought Gnosis was among 46 wallets that Argus found to have purchased tokens totaling $17.3 million, which shortly thereafter began trading on Coinbase, Binance and FTX. Wallet owners cannot be identified through a public blockchain.
Profits from the sale of tokens that were visible on the blockchain amounted to more than $ 1.7 million. However, the real profits from trades are likely significantly higher, since several shares were moved from wallets to exchanges, rather than sold directly for stablecoins or other currencies, Argus notes.
Argus focused only on wallets that exhibited recurring token buying patterns in the run-up to the listing announcement and sale shortly thereafter. The analysis revealed trading activity from February 2021 to April this year. This data was analyzed by The Wall Street Journal.
Insiders and attitudes towards them from cryptocurrency exchanges
Coinbase, Binance and FTX said they have a compliance policy prohibiting employees from trading sensitive information. Representatives of the latter two exchanges said that they conducted an analysis and concluded that the trading activity in the Argus report does not violate their policies. A Binance spokesperson also stated that none of the wallet addresses were associated with its employees.
Coinbase said it was conducting similar analyses as part of its efforts to ensure fairness. Coinbase executives have published a series of blogs dedicated to the problem of getting ahead of the curve.
“There is always the possibility that someone inside Coinbase may, wittingly or unwittingly, pass on information to outsiders engaged in illegal activities,” Coinbase CEO Brian Armstrong said last month. The exchange, he said, is investigating the actions of employees who appear to be associated with insider trading, and fires them if it is discovered that they helped such transactions.
Paul Greval, Coinbase’s general counsel, wrote in a blog post last Thursday that he said the company had seen information leaked about lists of upcoming digital coin listings. Coinbase has taken steps to prevent such behavior in the future, in addition to its efforts to prevent insider trading by employees, he said.
Similar wallets inThere were disputes in the crypto community about whether the targeted purchase of certain tokens before listing on exchanges indicates insider trading. Cryptocurrency markets are virtually unregulated. In recent years, regulators have been more attentive to market fairness for individual investors. The largest cryptocurrency Bitcoin fell by 24% in May, which led to serious losses for individual investors throughout the market.
Insider trading laws prohibit investors from trading stocks or commodities based on material non-public information, such as details of an upcoming listing or merger offer.
Some lawyers say that existing criminal laws and other regulations can be used to prosecute those who trade cryptocurrencies based on non-public information. But others in the cryptocurrency industry talk about the lack of precedents related to insider trading of cryptocurrencies, leading to uncertainty as to whether regulators can try to solve this problem in the future and how.
Cryptocurrency Exchanges’ Policy on Insider Trading
Argus CEO Owen Rapaport says that the internal compliance policy in cryptocurrency can be undermined by the lack of clear regulatory guidelines, the libertarian spirit of many who work in this field, and the lack of institutionalized norms against insider cryptocurrency trading compared to the norms in traditional finance.
“Companies have real challenges in ensuring that the code of ethics against insider trading that almost every firm has is actually adhered to, rather than remaining a dormant piece of paper,” says Mr Rapaport.
Securities and Exchange Commission (SEC) Chairman Gary Gensler recently stated that he sees similarities between the influx of individual investors into cryptocurrency markets and the stock boom of the 1920s, which foreshadowed the Great Depression, which led to the creation of the SEC and its powers to protect investors. “The retail public penetrated deeply into the markets in the 1920s, and we saw how that ended,” Mr. Gensler said. “Don’t let anyone say, ‘Well, we don’t need to defend ourselves against fraud and manipulation.’ This is where you lose confidence in the markets.”
Representatives of the exchanges said that they have rules to ensure that their employees will not be able to trade confidential information.
A Binance spokeswoman said employees can withhold any investment for 90 days, and the company’s executives are required to report quarterly on any trading activity.
“There is a long-standing process, including internal systems, that our security team should follow to investigate and hold accountable those involved in such behavior, immediately curbing such activities has minimal consequences,” she said.
FTX CEO Sam Bankman-Fried says the company explicitly prohibits employees from trading or sharing information related to upcoming token listings and has a policy to prevent this from happening. According to Mr. Bankman-Fried, the trade noted in the Argus analysis was not the result of any material violations of company policy.