In this article, we focus on cases of insider trading in crypto. Cryptocurrency trading is no different from the traditional stock trading, therefore fraudulent trading activities, such as insider trading and market manipulations are nothing new. We actually know very little about them, yet we experience them on a daily basis. These activities are however very often the reason that instil fear and insecurity into cryptocurrency investors.
Let’s take a look at some of the examples of insider trading and how the industry and authorities are handling them.
Korea
On September 28, 2017, an employee of a Korean cryptocurrency exchange Bithumb has revealed information about listing of ZCash to the anonymous individual before the information was publicly disclosed. Almost immediately after the ZCash started trading on Bithumb, the trading volume of the asset surged, as the price of ZCash increased from $280 to $450.
The second case of the insider trading in South Korea is tied to the governmental officials’ sell-off of digital assets prior to the announcement of the ban of some local cryptocurrency exchanges. The officials who were holding the assets knew that the ban would cause a drop in price, therefore they took the advantage of the information to make sure they avoid any potential losses.
USA
Coinbase, the U.S. based exchange, in its policy prohibits its employees and contractors from trading on material nonpublic information and communicating such information outside the company.
Nevertheless, in December, the price of the cryptocurrency bitcoin cash (BCH) surged hours before Coinbase announced it would list Bitcoin Cash. Industry community concluded that some individuals knew Coinbase would be adding bitcoin cash and took the advantage of the “intel” to buy it ahead.
What can be done against it?
Enforcing the prohibition of trading upon material nonpublic information against employee trading is likely a good idea. On the other hand, allowing employees to trade on insider information in violation of internal policies would enhance price accuracy, in that information about impending listings would be more quickly incorporated into coin price. However, in the case of Coinbase, this may not be particularly useful in practice. The BCH price did not shift only until a day prior to the listing on December 19, 2017.
Forbidding exchanges from trading on insider information to the extent that the authorities could prohibit them from doing so, is more challenging. Exchanges provide value when they choose to list coins. Allowing exchanges to trade on pending listings would increase the incentive for large, renowned exchanges like Coinbase to list more coins and tokens. This would allow more people (those who only trust such exchanges or who only want to purchase coins with fiat currency, a feature most exchanges don’t offer) to purchase those coins leading to increased demand in the market. Exchanges that decide to de-list smaller coins after shorting them, picking up profits while providing no value, could cause more concern.
Binance, the world’s largest cryptocurrency exchange by trading volume, has, for instance, implemented trading restrictions on its employees that its CEO says he learned from big investment banks. However, CEOs and top executives are sometimes not directly responsible for the breach. In many cases, lower level employees with limited access to information who are willing to risk their jobs by breaching internal policies may often be the ones to point a finger on.
To conclude, insider trading compromises confidence in the market by signaling impropriety on the part of those with at least some influence at exchanges. Given pre-existing fears surrounding market manipulation by exchanges, any behavior that signals impropriety could pose a threat to scare off investors and should therefore be avoided.
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