An analysis by Argus, a firm that helps companies manage employee trading, reveals that several crypto exchanges have perpetuated insider trading by providing inside information to selected investors about listed tokens in the past.
This, according to a report by Wall Street Journal, has helped these investors benefit immensely and has the potential to eventually destroy the potential of crypto investment globally.
According to Investopedia:
“Insider trading is the buying or selling of a publicly-traded company’s stock by someone who has non-public, material information about that stock. Material nonpublic information is any information that could substantially impact an investor’s decision to buy or sell the security that has not been made available to the public”
The study which looked at the months between February 2021 and April 2022 disclosed that many cryptocurrency investors benefit from inside information on when exchanges may list or lose assets.
The analysis reveals that some wallet owners were noted for frequently acquiring cryptocurrencies days before they are listed and selling them shortly after because of price surges often associated with getting listed on a major exchange.
For example, in August 2021, Binance announced that it would list Gnosis tokens and blockchain data revealed that a certain wallet on Binance amassed Gnosis coins worth $360,000 in six days leading to the listing.
The Binance listing resulted in a more than 7x spike in the coin value and the wallet began selling 4 minutes after the listing and finished selling all available tokens in 24 hours. By implication, the wallet made about $500,000 from the sale – a profit of around $140,000. The study also discovered that that was not the first time the wallet had done the same thing.
The other major exchanges were also accused of similar dealing by Argus. According to it, before they were listed on the three major exchanges, 46 wallets acquired Gnosis worth $17.3 million across major exchanges. While the owners’ identities are unknown, the sale of the tokens resulted in more than $1.7 million in public profits.
It is important to note that many of these wallets transferred a significant portion of the digital assets to other exchanges rather than selling straight, which is a pointer that the actual earnings are most likely higher.
The Argus report has resurrected the question of insider trading in crypto. Regulators and observers have voiced concerns about how the practice can put retail investors at a disadvantage. But, little or nothing has been done about it by major exchanges.
There is a history of backstory about crypto firms having front running wallets and insider trading issues complicities. A clear example was when Nate Chastain, head of product at the NFT marketplace – OpenSea was asked to resign by the company following allegations of insider trading in September 2021.
The allegations cropped up on Twitter when a user called @ZuwuTV posted transaction receipts from Ethereum addresses involved in front-running NFTs on the OpenSea website, which appeared to be tied to Chastain.
Chastain, the user alleged, was snapping up cheap NFTs before OpenSea planned to feature them on the site’s homepage, and then quickly selling them after the increased attention sent the prices up. OpenSea acknowledged in a statement that someone at their company was in fact doing this, but didn’t name Chastain.
Also in September 2021, according to a Bloomberg report, the Commodity Futures Trading Commission, which regulates United States derivatives markets, investigated Binance for insider trading.
The US regulators looked at whether it or its employees exploited access to data on millions of transactions, including trading on customer orders before executing them. However, there have been no substantial reports regarding the issue from CFTC since then.
As against traditional finance markets, cryptocurrency lacks a clear-cut regulatory system regarding insider trading. The challenge, many argue, is a lack of precedent cases specific to insider trading has created uncertainty about how regulators and watchdogs should react.
According to the CEO of Argus ,Owen Rapaport, internal compliance procedures in cryptocurrency may be jeopardized by a lack of clear regulatory guidelines, the libertarian mindset of many who work in the industry, and the absence of institutionalized norms against insider trading in crypto when compared to traditional finance.
“Firms have real challenges with making sure the code of ethics against insider trading—which almost every firm has—is actually followed rather than being an inert piece of paper.”CEO of Argus ,Owen Rapaport
Binance, Coinbase and FTX deny complicity
The three exchanges have all denied the accusations. Coinbase, Binance, and FTX have similarly stated that their compliance rules forbid staff from trading or giving out privileged information to investors.
Binance’s rep stated that none of the wallet addresses got linked to employees.
“There is a longstanding process in place, including internal systems, that our security team follows to investigate and hold those accountable that have engaged in this type of behavior, with immediate termination being minimal repercussion.” – Binance’s Spokesperson.
Apart from the Binance spokesperson’s official statements, Changpeng Zhao, CEO of Binance has also come out on Twitter to dispute the accusations. CZ said that Binance has a zero-tolerance policy on insider trading and that it adheres to the highest standards.
He said Binance avoids revealing listing plans for coins even to their own teams to prevent insider trading incidents. He however admitted that preventing the disclosure of listing schedules is not feasible.
He further provided a whistleblower email address ([email protected]) so that anyone could report any suspicious trading activity at the exchange.
Coinbase executives have written several blogs addressing the topic. The company said it does similar checks to assure fairness.
The CEO of FTX – Sam Bankman-Fried, also gave a similar take when he said that his firm explicitly bans its workers from trading tokens that will be listed.
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