Crypto might have an insider trading problem


In six days last August, a crypto wallet earned a stake of $360,000 worth of Gnosis coins, a token tied to an effort to create a blockchain-based prediction market. On the seventh day, Binance, the world’s largest cryptocurrency exchange, said in a blog post that it would list Gnosis, allowing it to trade among its users.

Token listings add both liquidity and a seal of validity to the token, and often boost the trading value of the token. The price of Gnosis rose sharply from around $300 to $410 within an hour. Gnosis’ trading value exceeded seven times its seven-day average on that day.

According to an analysis by Argus Inc., four minutes after Binance’s announcement, Wallet began selling its stake, liquidating it completely for a little over $500,000 in just four hours – a profit of around $140,000. And a return of about 40%. ., a firm that provides software to companies to manage the business of employees. The same wallet exhibited a similar pattern of buying the token prior to its listing and selling it quickly with at least three other tokens.

The crypto ecosystem is increasingly grappling with the headaches that the world of traditional finance dealt with decades ago. The collapse of a so-called stablecoin from its dollar peg earlier this month stemmed from the crypto’s version of a bank run. How cryptocurrency exchanges prevent the leaking of market-sensitive information has also become a matter of concern. The attention comes as regulators are raising questions about the fairness of the market for retail users, many of whom have just reported huge losses on the steep fall in crypto assets.

The wallets that bought Gnosis were among 46 that Argus found had purchased a total of $17.3 million worth of tokens that were listed on Coinbase, Binance and FTX soon after. Wallet owners cannot be determined via a public blockchain.

A total of more than $1.7 million was generated from the sale of tokens that appeared on the blockchain. The actual profit from the trades is likely to be significantly higher, however, as many of the stakes were transferred from wallets to exchanges, rather than being traded directly for stablecoins or other currencies, Argus said.

Argus focused only on wallets that displayed a repeated pattern of buying tokens in order to sell and immediately following the listing announcement. The analysis flagged trading activity from February 2021 to April of this year. The data was reviewed by the Wall Street Journal.

Coinbase, Binance and FTX each said they have compliance policies that prevent employees from trading on privileged information. The latter two said they reviewed the analysis and determined that the trading activity Argus reported did not violate their policies. A Binance spokesperson also said that none of the wallet addresses are linked to its employees.

Coinbase said it is conducting similar analysis as part of its efforts to ensure fairness. Coinbase executives have posted a series of blogs touching on the issue of front running.

“There is always the possibility that someone inside Coinbase may, unintentionally or unintentionally, leak information to outsiders involved in illegal activities,” Coinbase chief executive Brian Armstrong wrote last month. The exchange, he said, scrutinizes employees who appear to be involved in front running and terminates them if they are found to have aided in such trades.

Coinbase Chief Legal Officer Paul Grewal posted a blog post on Thursday. The company has observed information about listing leaks prior to the announcements through merchants who trace digital evidence of exchanges testing the tokens prior to the public announcement, he said. He added that Coinbase has taken steps to reduce this in addition to its efforts to prevent insider trading of employees.

Such wallets have caused debate in the crypto community as to whether targeted purchases of specific tokens prior to listing on exchanges constitute insider trading. Crypto markets are largely unregulated. In recent years, regulators have looked more closely at market fairness to individual investors. The largest cryptocurrency, Bitcoin, is down 24% in May, causing huge losses to individual investors across the market.

Insider trading laws prohibit investors from trading stocks or commodities on knowledge of material non-public information, such as an upcoming listing or merger proposal.

Some lawyers say that existing criminal law and other regulations can be used after those trading cryptocurrencies with personal information. But others in the cryptocurrency industry say the lack of specific precedent for crypto insider trading has led to uncertainty about whether and how regulators might try to tackle it in the future.

Argus CEO Owen Rapaport said that internal compliance policies in crypto are underpinned by the lack of clear regulatory guidelines, the liberal ethos of many working in the space, and the lack of institutional norms against insider trading in crypto compared to traditional finance. could.

“There are real challenges facing firms in ensuring that the code of conduct against insider trading – which almost every firm has – is actually followed,” Mr. Rapaport said.

Securities and Exchange Commission Chairman Gary Gensler said on Monday that he saw a parallel between the influx of individual investors into crypto markets and the stock boom of the 1920s, which triggered the Great Depression, which led to the creation of the SEC and to protect investors. For this it was mandated. “The retail masses penetrated the markets deeply in the 1920s and we saw how it turned out,” Gensler said. “Don’t let anyone say ‘Okay, we don’t have to protect you from fraud and manipulation.’ That’s where you lose confidence in the markets.”

Spokesmen for the exchanges said they have policies in place to ensure that their employees cannot trade sensitive information.

A Binance spokesperson said that employees have a 90-day hold on any investments they make and that company leaders are mandated to report any trading activity on a quarterly basis.

“While there is a lengthy process, including internal systems, that our security team investigates and holds accountable to those who engage in this type of behavior, immediate termination is minimal impact,” she said.

FTX CEO Sam Bankman-Fried said in an email that the company explicitly prohibits employees from sharing or sharing information related to upcoming token listings and has a policy to prevent this. Mr Bankman-Fried said the trading highlighted in Argus’ analysis was not the result of any actual violations of company policy.

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