The crypto industry has an insider trading problem. While no official laws or regulations explicitly prohibit insider trading within crypto, industry observers suspect that it happens more often than you think.
Few crypto exchanges and companies are actually listed on traditional stock exchanges, so ‘insider trading’ in the normal sense doesn’t happen in crypto. Nonetheless, insider trading has its forms within crypto. It could be a group of people, such as founders, team members, who have knowledge not shared by the whole market and use it to buy/sell tokens before the market gets the news. Also, it might be exchanges buying a coin before announcing plans to list it.
These forms of trading have a toxic effect on crypto, undermining confidence in exchanges, startups, and deterring the wider public from investing. That’s why regulation might be necessary to make crypto’s own forms of insider trading illegal.
“It is obvious some people will always have access to information not readily available to others,” said Fawad Razaqzada, an analyst with ThinkMarkets. “For example, when a particular cryptocurrency is about to be listed on an exchange, some people that work in that exchange will obviously know about it. Whether they act on that information is dependent on the person or persons.”
Speaking to Cryptonews.com, Razaqzada added, “I strongly believe a lot of such activity goes on, but can’t prove it.”
He’s not alone. Traders have accused Coinbase of insider trading on various occasions, stretching back to its listing of bitcoin cash (BCH) in 2018 and occurring as recently as May, when Coinbase’s listing of omisego (OMG) caused the token to jump dramatically in price.
This is ridiculous. This morning OMG traded at $3.90 on Coinbase while trading at $2.14 on Binance (82.34% premium… https://t.co/amCrZpJTHL
Similar accusations have been levelled at other major exchanges, such as Binance (which listed XRP in January, before an XRP pump) and BitMEX (which Nouriel Roubini has directly accused of insider trading).
Coinbase, Binance, BitMex, and other crypto exchanges deny all accusations of insider trading.
However, Prof. Philipp Sandner, the head of the Frankfurt School Blockchain Center, argued that in the area of cryptoassets we primarily encounter price manipulations rather than insider trading.
“This especially holds true for alternative cryptocurrencies with a much lower market capitalization than bitcoin (BTC) or ethereum (ETH). Here, so-called pump-and-dump schemes or sell walls are used to artificially manipulate prices,” he said.
Sandner also thinks insider trading involving security token offerings (STOs) is also possible. However, he’s “not aware of any case so far.”
“Given the nature of this industry, I don’t think it is easy or even legal to prosecute insider trading in cryptos,” said Fawad Razagzada.
Reducing insider trading within crypto may be difficult, but Philipp Sandner expected that it will decline naturally, as the market concentrates more on established cryptos and less on newly created or listed coins.
On top of this, regulators can also take action, something which will be easier as the market matures and consolidates.
“Regulation is definitely needed and the right answer,” said Sandner. “However, it remains to be seen whether stronger regulation alone can prevent price manipulation. In conjunction with a maturing market, I anticipate that price manipulation will decline.”
Sandner pointed out that strongly regulated markets such as Börse Stuttgart — which now offers crypto trading — likely make insider trading nearly impossible.
“Such companies will probably do their best to serve their customers, as they are regulated,” he said. “This needs to be opposed to unregulated offshore market places, or decentralized exchanges.”
It might be some time before crypto exchanges are regulated to the extent where insider trading becomes illegal.
“Users might choose their crypto exchange wisely,” he said. “The user has the full breadth: fully regulated exchanges with a high reputation or unknown offshore crypto exchanges.”
With insider trading existing within ‘traditional’ markets even today, don’t expect full regulation and maturation to completely eradicate insider trading in crypto. It may just be a ‘fact’ of life, so rather than wait for a perfect market, it might be better to hedge against surprises.