In January, the brother of a former Coinbase product manager was sentenced to 10 months in prison for wire fraud conspiracy in what prosecutors called
In January, the brother of a former Coinbase product manager was sentenced to 10 months in prison for wire fraud conspiracy in what prosecutors called the first case of insider trading involving cryptocurrencies. In September 2022, Nikhil Wahi entered a guilty plea for executing trades based on private data obtained from his brother, Ishan Wahi, a former product manager for Coinbase.
Most countries have laws against insider trading, which carry stiff penalties like jail time and heavy fines. The recent insider trading investigation against crypto exchanges by the United States Securities and Exchange Commission indicates that regulatory bodies are prepared to stop financial misconduct in crypto marketplaces.
Without clear regulation, many have questioned whether other exchanges and platforms have similar rogue employees participating in illegal trades.
Prosecutors raised a similar case against an OpenSea executive in a lawsuit filed in October 2022, with concerns growing in the wake of the FTX collapse and the alleged misconduct of its executives.
Binance listings-related token dumps became a hot topic weeks after the first insider trading conviction. Conor Grogan, a director of Coinbase, used Twitter to draw attention to the recent transaction activities of a few anonymous wallets. The unidentified wallets allegedly purchased several unlisted tokens minutes before Binance announced their listing and sold them as soon as the announcement was made public.
These wallets have made hundreds of thousands of dollars off price spikes in new tokens listed on Binance. The trade’s accuracy suggests that the wallet owners have access to intimate knowledge about these listings. According to Grogan, this could potentially be the work of 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.”
Binance recently announced a 90-day token sale policy for employees and family members to fight insider trading. The policy prohibits the sale of any newly listed token on the exchange within the mentioned time frame. A spokesperson for the crypto exchange told Cointelegraph that it has a zero-tolerance policy for any employees using insider information for profit and adheres to a strict ethical code related to any behavior that could harm customers or the industry.
“At Binance, we have the industry’s leading cybersecurity and digital investigations team composed of more than 120 former law enforcement agents and security and intelligence experts who investigate both external and internal wrongful behavior. There is a long-standing process in place, including internal systems, that our security team follows to investigate and hold those accountable who have engaged in this type of behavior,” the spokesperson said.
How insider trading in crypto is different from traditional markets
The blockchain is a public, immutable database that stores all transaction histories for cryptocurrencies. While digital wallets conceal traders’ real identities, the blockchains’ openness and transparency enable researchers to access precise transaction data to examine crime and misbehavior.
Ruadhan O, the lead developer at token system Seasonal Tokens, told Cointelegraph that insider trading in crypto doesn’t happen in the same way it happens in the stock market. In the case of stocks, insiders are those with non-public knowledge of upcoming news about the company that will affect its performance.
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He added that these people are company employees, legislators and policymakers. In the case of cryptocurrencies, the people running the exchanges have the opportunity to front-run large trades and manipulate the market. In both cases, insider trading defrauds honest investors in a way that’s very difficult to detect. He explained how exchanges could work with existing policies to ensure fair price discovery:
“The United States could enforce strict regulations requiring incoming cryptocurrency orders to be processed by a public order-matching system, which would prevent front-running. This would help to create a safe system for cryptocurrency investors within the U.S., but it would also drive most cryptocurrency trading offshore. Fully stopping insider trading at the largest exchanges would require international coordination, and competing governments are unlikely to agree on measures that would harm their domestic economies.”
According to a study by Columbia Law School, a group of four linked wallets frequently bought cryptocurrency hours before formal listing announcements, which resulted in gains of $1.5 million. Before the formal listing announcement, the identified wallets bought the impacted tokens and stopped trading as soon as they sold their positions. The study found these digital wallets’ trade history to be precise, suggesting the owners had…
cointelegraph.com