Public Data Suggests an Insider Trading Problem in Crypto

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Last August, one cryptocurrency wallet amassed a 360,000 USD  stake in Gnosis coins, a token tied to a project to develop blockchain-based prediction markets. Soon after, Binance, the world’s largest crypto exchange by volume, announced in its blog post that it would list Gnosis and allow its users to trade it.

Token listings provide liquidity and validity to the token and a boost to the token’s trading price. Within an hour, the price of Gnosis jumped from roughly 300 to 410 USD. That day, the value of Gnosis trading was up 7x times its seven-day average.

According to an analysis conducted by Argus Inc., a firm that provides companies with software to manage employee trading, the wallet began selling down its stake four minutes after Binance’s announcement. It liquidated its entire holding within four hours for over 500k USD, netting a profit of around 140k USD, a roughly 40% return. 

The same wallet portrayed identical purchasing and selling tendencies with at least three other tokens before and after their postings.

Source: CoinMarketCap, Image: WSJ

The Struggle is Real

The crypto ecosystem is progressively facing problems that traditional finance was coping with decades ago. Many are concerned about how crypto exchanges would keep sensitive market information from leaking. 

The focus comes as regulators question the market’s fairness for retail users, many of whom have recently suffered significant losses due to rapid falls in cryptocurrencies.

The wallet that bought Gnosis was one of 46 discovered by Argus that bought a collective 17.3 million USD worth of coins listed on exchanges like Coinbase, Binance, and FTX shortly after. The owners of the wallets cannot be verified using the public blockchain.

More than $1.7 million was generated via sales of tokens accessible on the blockchain. However, because numerous parts of the stakes were shifted from wallets to exchanges rather than being swapped directly for altcoins or other currencies, the real profits from the trades are likely to be substantially higher, said Argus.

Argus only looked at wallets with a history of buying tokens before listing announcements and selling them soon after. It tracked trading activities from February 2021 to April of this year.

The Need for Clear Crypto Regulations

Under insider trading rules, investors are prohibited from trading stocks or commodities based on insider information, including knowledge of a pending listing or merger offer. However, cryptocurrency markets are mostly dysfunctional. Although, in recent years, regulators have scrutinized the market’s impartiality for individual investors. 

In May, the leading cryptocurrency, Bitcoin, fell by 24%, resulting in significant losses for retail investors across the market.

Existing criminal statutes and other rules, according to some lawyers, might be used to prosecute persons who trade cryptocurrencies with personal information. Others in the cryptocurrency business, on the other hand, claim that a lack of case precedent unique to crypto insider trading has generated uncertainty about if and how regulators would address the issue in the future.

A lack of clear regulatory requirements can undermine internal compliance measures in crypto, the libertarian mindset of many in the industry, and the lack of standardized norms against insider trading in crypto compared to traditional finance, said Owen Rapaport, CEO of Argus.

Gary Gensler, Chairman of the SEC (Securities and Exchange Commission), said that he sees parallels between the upsurge of retail investors into crypto markets and the stock boom of the 1920s, which resulted in the creation of the SEC and its mandate to protect investors, because of the Great Depression that followed. 

He added, “The retail public had delved significantly into the markets in the 1920s, and we saw how that worked out. Don’t let anyone tell you that there is no need to defend yourself from fraud and manipulation. That is when you lose faith in markets.”

Read more about the need for regulation in the crypto market in Coinbase Melting Down Amid the Great Crypto Deflation.

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Rucha Joshi, currently managing a team of over 20 content writers at TimesNext is fueled by her passion for creative writing. She is eager to turn information into action. With her hunger for knowledge, she considers herself a forever student and a passionate leader.

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