How Crypto Exchanges Got Involved in Insider Trading
2023.02.07 13:28
How Crypto Exchanges Got Involved in Insider Trading
By Tiffany Smith
Budrigannews.com – In what prosecutors referred to as the first instance of insider trading involving cryptocurrencies, the brother of a former Coinbase product manager was handed a 10-month prison sentence in January for conspiracy to commit wire fraud. Nikhil Wahi entered a guilty plea in September 2022 for making trades using private information from his brother, Ishan Wahi, a former Coinbase product manager.
Insider trading is illegal in most countries, and violating these laws can result in severe penalties like jail time and large fines. The Securities and Exchange Commission of the United States of America’s recent insider trading investigation of cryptocurrency exchanges demonstrates that regulatory bodies are prepared to put an end to financial misconduct in crypto marketplaces.
Many people have wondered if other exchanges and platforms have similarly rogue employees engaging in illegal trades due to the absence of clear regulations.
Concerns grew in the wake of the FTX collapse and the alleged misconduct of its executives, so in a lawsuit filed in October 2022, the prosecution made a similar case against an OpenSea executive.
After the first conviction for insider trading, the topic of token dumps related to Binance listings became very popular. Conor Grogan, a director at Coinbase, used Twitter to make people aware of some anonymous wallets’ recent transactions. The unidentified wallets are said to have bought a number of unlisted tokens minutes before Binance announced their listing and then sold them as soon as it became public.
Price spikes in new Binance-listed tokens have made hundreds of thousands of dollars for these wallets. The wallet owners may have intimate knowledge of these listings due to the trade’s accuracy. Grogan suggests that a “rogue employee related to the listings team who would have information on fresh asset announcements or a trader who discovered some sort of API or staging/test trade exchange leak” could be responsible for this.
To combat insider trading, Binance recently announced a 90-day token sale policy for family members and employees. Within the stipulated time frame, the policy prohibits the sale of any newly listed token on the exchange. Cointelegraph was informed by a spokesperson for the cryptocurrency exchange that the company upholds a stringent code of ethics regarding any behavior that has the potential to harm customers or the industry and has a zero-tolerance policy for employees who use insider information for profit.
“At Binance, we have the best cybersecurity and digital investigations team in the business. It is made up of more than 120 former law enforcement officers and security and intelligence experts who look into wrongdoing both internally and externally. The spokesperson stated, “Our security team follows a long-standing process, including internal systems, to investigate and hold those who have engaged in this type of behavior accountable.”
All cryptocurrency transaction histories are stored in a public, immutable database known as the blockchain. Blockchains’ openness and transparency make it possible for researchers to access precise transaction data in order to investigate crimes and misbehavior, whereas digital wallets conceal traders’ actual identities.
Seasonal Tokens’ lead developer, Ruadhan O, told Cointelegraph that insider trading in cryptocurrencies is different from insider trading in the stock market. Insiders are people who know about upcoming company news that will have an impact on the stock’s performance.
He went on to say that these people are employees of the company, legislators, and policymakers. When it comes to cryptocurrencies, the people who run the exchanges have the opportunity to manipulate the market and lead large trades in advance. Insider trading defrauds honest investors in both instances in a manner that is extremely difficult to identify. In order to guarantee fair price discovery, he explained how exchanges could integrate with existing policies:
“Preventing front-running, the United States could impose stringent regulations that require incoming cryptocurrency orders to be processed by a public order-matching system. The majority of cryptocurrency trading would move offshore, but this would contribute to the establishment of a secure system for U.S. cryptocurrency investors. It would take international coordination to completely stop insider trading at the largest exchanges, and competing governments are unlikely to agree on measures that would hurt their own economies.
A Columbia Law School study found that four linked wallets frequently bought cryptocurrency hours before official listing announcements, earning $1.5 million in gains. The identified wallets purchased the impacted tokens prior to the official announcement of the listing and immediately ceased trading when they sold their positions. The study found that the trade history of these digital wallets was accurate, indicating that the owners had access to private information about cryptocurrencies that were scheduled to be listed on exchanges.
Insider trading on listing announcements was found in 10–25% of the cryptocurrencies in the sample, according to the study.
The study says that cryptocurrency markets have a bigger problem with insider trading than traditional stock markets. Before listing announcements, statistical data also demonstrates notable anomalous returns and run-up patterns. Insider trading cases in a stock market are comparable to these trading patterns.
According to Jeremy Epstein, chief marketing officer at layer-1 protocol Radix, a crypto exchange should be regulated in the same way as a traditional financial services company that deals in markets. He elaborated:
“Again, this latest scandal demonstrates how much better a decentralized financial system with openness to all will be for consumers and market participants, who won’t have to worry as much about being taken advantage of by insiders. Although insider trading will not disappear, it will be simpler and quicker to identify, saving victims millions of dollars.
In traditional financial markets, insider trading is a well-known phenomenon in which a person uses confidential information to benefit from illegal trading. In traditional markets, former exchange employees aren’t always the only ones who get caught up in the insider trading frenzy.
It has been discovered that numerous current politicians and policymakers were involved in such activities. A study by the New York Times found that at least 97 current members of Congress either disclosed similar actions taken by their spouses or dependent children or made purchases or sales of stocks, bonds, or other financial assets related to their employment as lawmakers.
Another notable incident was the 2020 congressional insider trading scandal, in which senators violated the STOCK Act by selling stocks at the beginning of the COVID-19 pandemic using information from a secret Senate meeting. The stock transactions were the subject of an investigation launched by the Department of Justice on March 30, 2020. Nobody was ever charged, and all inquiries are now closed.
This well-publicized case of insider trading in traditional markets demonstrates that, despite all of the laws and regulations in place, the same policymakers who were supposed to protect investors’ interests were allegedly involved in the same activities.
Some of the fundamental critical issues cannot be addressed by regulations alone. Bitfinex’s chief technical officer, Paolo Ardoino, is of the opinion that crypto should not be the target of it.
Ardoino told Cointelegraph that until there are clear rules and guidelines to protect against such abuse, there would be opportunities for abuse in a young industry like crypto. For true price discovery, he stated, safeguards against asymmetric information flow are necessary. He elaborated:
“I think that policymakers and crypto exchanges should collaborate to create a regulatory framework that will allow the industry to flourish while safeguarding all participants from market abuses. The primary objective of Bitfinex, a cryptocurrency exchange at the forefront of technological innovation in digital token trading, has always been to provide traders with a transparent and safe environment. That ethos will continue to guide us.
After the collapse of FTX, there have been more calls for regulations. As a result, crypto exchanges are taking extra precautions to track and guarantee fair trading and better protect their customers.
