The issue of insider trading on crypto markets


Former OpenSea product manager Nathaniel Chastain was detained in the United States. He was accused of insider trading of NFTs and subsequent money laundering. State prosecutors believe he made use of OpenSea’s sensitive data for his own purposes. This is the by far the first case in the history of insider trading when an actual arrest takes place.

In fact, it happened on June 1 of this year, but the history is replete with examples of this kind, such as fraud that took place some time before, on April 12, when a trader bought obscure altcoins for $400,000 and the next day sold them for $572,000 just minutes before the announcement of their listing on Coinbase. The crypto community assumes that this is yet another illustration of insider trading – the exploitation of private or secret information to take a competitive advantage when trading crypto assets. 

What insider trading is

Insiders and insider trading — these are terms that came into the world of crypto from the traditional stock market. 

Insiders are people or companies with tacit knowledge of securities or their issuers, that is, someone who knows more about the true state of affairs than common investors.

Insider information is nondisclosed details that give you an advantage when dealing or may be used to manipulate the asset price. In other words, the insider knows something about the issuer of an asset which facilitates him to sell or buy the asset in a more profitable way. 

However, analytical forecasts, pundits’ opinions, and public news about the project are not considered to be insider information. If the information is publicly available, it is not insider information either. For this reason, you should not search for non-public data in various so-called insider channels, chats, and forums. As a rule, most of these spaces are designed to sell what some call “exclusive access to closed chat rooms” to naive users. In reality, the likelihood that the real insiders will put worthwhile pieces of info out into the public domain is next to none. 

Insider trading refers to the use of insider information during a market transaction. For example, news of an upcoming partnership or listing, an exploit found, or an ongoing investigation by the authorities against the project can have a significant impact on the price of an asset. 

When it comes to the stock market, insiders can represent principal shareholders, top managers, board members, auditors, management companies, brokers and other professional market participants. According to securities laws, insiders are required to report to the stock exchange regulator agencies on transactions in their company’s securities. Moreover, they are not allowed to trade them on the exchange in certain cases, for example, before the publication of reports.

What are the dangers of insider trading?

This type of trading adversely affects each and every market because: 

  • it allows unscrupulous players to manipulate the market; 
  • it is a chance for an insider to gain profits, while also resulting in heavy losses on the part of other traders; 
  • it corrupts the reputation of companies whose employees are caught red-handed;
  • it diminishes credibility in the market and creates an unequal trading experience as it is unfair if some users possess more data than others. This could affect the growth rate of the entire industry in the long run;
  • it provides regulator agencies with more reasons to tighten market supervision.

This is why insider trading in the stock market is a criminal offense penalized by large fines or sometimes even imprisonment. Although there have been no such instances in Russia, this type of fraud is strictly monitored in the U.S.

As for the crypto market, insider trading is still very poorly regulated. 

The crypto market in the USA is regulated by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). It is they who should prosecute employees and issuers of crypto projects caught in the act of cheating. Yet this has not happened in a real-case scenario. The charges against Nathaniel Chastain, which we mentioned early in the article to which we will refer in more detail below, were brought by the Department of Justice (DOJ). In case of the stock market, lawsuits over possible insider trading can drag on for years. So far, the crypto market is much less strictly controlled, with many users remaining anonymous.

Some examples of insider trading

Now we will look at a few notable and notorious cases of this type of fraud. 

Insider trading conducted by employees of the regulatory agency. Occasionally, private data is used for trading not only by crypto platforms, but by those who are supposed to maintain them as well. 

Back in early 2018, South Korea’s Financial Supervisory Service (FSS) reported an investigation into insider trading in digital assets among the agency’s employees. The head of the FSS at the time admitted that agency officials hastily got rid of their cryptocurrencies before the announcement of tightening control over the national crypto platforms. At that point in time, however, the law did not prohibit government employees from trading in digital assets, so no one was called to account. 

Insiders at Skyсoin. Over the course of the same year, crypto-enthusiast Jared Dunn uploaded an audio recording to Twitter where Brandon Synth, head of the Skycoin project, revealed instances of coin price manipulation and insider trading by several staff members and the admin of the project’s Telegram channel. They allegedly caused the price of the SKY coin to skyrocket from $9 to $38. The incident did not progress any further.

Investigation into insider trading on Binance As of September 2021, the SEC launched an investigation into possible insider trading and market manipulation at the world’s largest crypto exchange. The CFTC is probably involved in the probe as well. The exchange claimed that it has a policy of absolute disapproval of insider trading and that it is monitored by the security service, “which brings to justice those who took part in such a thing” [it all sounds like an acknowledgement that such things happen]. As yet, no one knows anything about the findings of the agencies.

Nathaniel Chastain, OpenSea product manager. In September 2021, Nathaniel Chastain, product manager of OpenSea, the largest NFT marketplace, as well as former senior product manager of MetaMask Ethereum-based wallet, was caught in an abuse of position and insider trading. It turned out that he was purchasing NFTs right before they were posted on the OpenSea home page, which he then sold after the price spiked. Similar to a number of NFT-platforms, such as Nifty Gateway, the tokens for the OpenSea homepage are hand-picked rather than selected by a special algorithm, indicating that you know in advance exactly which assets will get there. 

Conclusion

It is quite difficult to say for sure how prevalent insider trading within the crypto market is. No doubt it exists, and the illustrations above demonstrate just how profitable it can be. As a result, it seems to be impossible to trace such cases, and it is even more challenging to prove the fact of insider trading. 

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