According to an analysis of public data, several wallets have a pattern of buying and selling tokens days before the offering date. According to a Wall Street Journal report, insider trading has been widespread in the crypto industry. Moreover, an Argus study identifies companies with high numbers of employees trading cryptocurrencies.
Following the WSJ report, Binance’s Co-founder and CEO, Changpeng Zhao, has debunked it and issued remarks accordingly. The article claimed that Binance employees took part in insider trading of Gnosis tokens in August 2021.
Insider trading has become a problem in the crypto industry
According to a Wall Street Journal report, many cryptocurrency investors benefit from inside information on when exchanges may lose assets. The analysis reveals that some wallets frequently buy cryptocurrencies days before they are listed and sell them shortly after.
The study looked at the months between February 2021 and April 2022. Argus investigated wallets that showed a pattern of acquiring tokens in the build-up to a listing announcement and then selling them shortly after. The Wall Street Journal verified the information.
Insider trading is widespread on most major exchanges, including Binance, Coinbase, and FTX. The prices of a cryptocurrency got driven by adding a new exchange to list its token.
According to blockchain data, a wallet amassed Gnosis coins worth $360,000 in six days in August. Binance announced that it would list Gnosis on the seventh day, resulting in the price rising more than seven times its usual over the previous seven days.
The wallet began selling 4 minutes after Binance announced the listing and finished selling everything in 24 hours. They made $500,000 from the sale, taking home a profit of around $140,000. The study discovered that this isn’t the first time the wallet has done precisely the same thing.
According to the report by Argus, before they were revealed on the three major exchanges, 46 wallets acquired $17.3 million in Cryptocurrencies. The owners’ identities, however, are unknown.
Although the sale of tokens resulted in more than $1.7 million in public profits, the actual earnings are most likely higher. According to the company, many wallets have transferred a portion of their assets to exchanges rather than selling straight.
Insider trading in cryptocurrency has reared its ugly head once again. Regulators and watchdogs have claimed that this method has been adverse to regular investors for a long time. However, thus far, little has been done.
The crypto industry is having difficulties that the world of conventional finance has long overcome. Earlier this month, the failure of a so-called stablecoin, LUNA, which maintains a $1 value against the dollar, was caused by crypto’s version of a bank run.
Another emerging problem is preventing market-sensitive information from leaking via cryptocurrency exchanges. The attention comes as regulators are increasingly concerned about the fairness of the market for retail users, many of whom have just booked significant losses owing to considerable drops in crypto assets.
Binance has a zero-tolerance policy on insider trading, CZ
However, the exchanges attributed to the study have denied it. Coinbase, Binance, and FTX stated that their compliance rules forbid staff from trading on privileged information. The two companies said they had reviewed the report and found that Argus’s trading in past data did not violate their rules.
Binance’s rep stated that none of the wallet addresses got linked to employees. Coinbase said it does similar checks to assure fairness. In light of concerns about front-running, Coinbase executives have written several blogs addressing the topic. A representative for Binance said:
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.
The CEO of the FTX crypto exchange, Sam Bankman-Fried, also gave a similar take when he said that his firm forbids its workers from trading tokens that will be listed. Apart from Binance’s spokesperson’s official statements, Binance’s CEO, Changpeng Zhao, has had to dispel the report on his own.
In his response, CZ said that Binance has a zero-tolerance policy on the behavior in question and that it adheres to the highest standards. He also provided a whistleblower email address (firstname.lastname@example.org) so that anyone could report any suspicious trading activity at the exchange.
According to CZ, Binance avoids revealing listing plans for coins even to their own teams to prevent insider trading incidents. However, he conceded that preventing the disclosure of listing schedules is not feasible. He gave the example of when Binance requests technical assistance from the team.
According to CEO Owen Rapaport of Argus, 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.
Insider trading laws prohibit investors from profiting on nonpublic information that they get through their positions in stocks or commodities, such as knowledge of a forthcoming listing or merger offer.
According to certain attorneys, government entities may utilize existing criminal laws and other rules to prosecute individuals trading cryptocurrencies with sensitive information. Others in the cryptocurrency sector, on the other hand, argue that a lack of case precedent specific to insider trading has created uncertainty about whether and how regulators will react in the future.