Crypto Might Have an Insider Trading Problem

Public data suggests that some anonymous crypto investors have profited from insider knowledge of when tokens will be listed on exchanges.

Over six days last August, a crypto wallet amassed $360,000 worth of stakes in Gnosis coin, a token tied to an effort to build a prediction market based on Gnosis. blockchain. On Saturday, Binance — the world’s largest cryptocurrency exchange by volume — said in a blog post that it will list Gnosis, allowing it to be traded among its users.

The token list adds both liquidity and stamps legitimacy to the token and often provides a boost to the token’s transaction price. The price of Gnosis skyrocketed, from about $300 to $410 within an hour. The value of Gnosis traded that day has increased more than seven times its seven-day average.

Four minutes after Binance’s announcement, the wallet started selling off its holdings, liquidating them all in just over four hours for a little over $500,000 – making a profit of about $140,000 and a profit of about 40%. , according to an analysis done by Argus Inc., a company that provides companies with software to manage employee transactions. The same wallet demonstrated similar patterns of buying tokens prior to listing and quick selling afterwards with at least three other tokens.

The crypto ecosystem is increasingly grappling with headaches that the traditional financial world tackled decades ago. The fall of a cryptocurrency known as a stablecoin from its dollar rate earlier this month stemmed from the crypto version of a bank run. How cryptocurrency exchanges prevent the leakage of sensitive market information has also become a topic of increasing interest. The focus comes as regulators are questioning the fairness of the market for retail users, many of whom have just recorded massive losses due to a sharp drop in crypto assets.

The Gnosis Buy Wallet was among 46 wallets Argus found that bought a total of $17.3 million worth of tokens that were listed shortly after on Coinbase.,

COIN -1.88%

Binance and FTX. The owner of the wallet cannot be determined through the public blockchain.

Profits from the sale of tokens visible on the blockchain totaled over $1.7 million. However, the real return from trades can be significantly higher, as a small fraction of the stakes have been moved from wallets to exchanges instead of trading directly for stablecoins or other currencies, Argus speak.

Argus only focuses on wallets that exhibit repeated token buying patterns prior to the listing announcement and immediate sale. The analysis flagged trading activity from February 2021 to April this year. The data has been reviewed by the Wall Street Journal.

Coinbase, Binance, and FTX each have said they have compliance policies that prohibit employees from trading on privileged information. The two later said they had reviewed the analysis and determined that the trading activity reported by Argus did not violate their policies. A spokesperson for Binance also said that there are no wallet addresses associated with its employees.

Coinbase says it performs similar analyzes as part of its efforts to ensure fairness. Coinbase executives have posted a series of blogs regarding the pre-run issue.

“There is always the possibility that someone inside Coinbase, knowingly or unknowingly, discloses information to outsiders engaged in illegal activity,” Coinbase CEO Brian Armstrong wrote in September. prior to. The exchange, he said, investigates employees involved in prior operations and terminates contracts if they are found to have facilitated such transactions.

Paul Grewal, Coinbase’s chief legal officer, continued with a blog post on Thursday. The company saw information about the leaked listing prior to the announcement through traders discovering digital evidence that exchanges were testing tokens prior to the public announcement, he said. Coinbase has taken steps to mitigate that in addition to efforts to prevent employee insider trading, he said.

Wallets like these have sparked debate in the crypto community about whether targeted purchases of specific tokens prior to exchange listing lead to insider trading. The cryptocurrency market is largely unregulated. In recent years, regulators have taken a closer look at the fairness of the market for individual investors. The largest cryptocurrency bitcoin fell 24% in May, causing massive damage to individual investors across the market.

Insider trading laws prohibit investors from trading stocks or commodities on material non-public information, such as knowledge of an upcoming listing or merger proposal.

Some lawyers say that existing criminal and other regulations can be used to deal with cryptocurrency transactions with personal information. But others in the crypto industry say that the lack of specific case precedents for crypto insider trading has created uncertainty about whether regulators can find a way around it. how it will be in the future.

Argus CEO Owen Rapaport said that internal compliance policies in crypto could be cut due to the lack of clear regulatory guidelines, the liberal nature of many people working in the space, and the lack of regulations. institutionalized regulation against insider trading in cryptocurrencies compared to regulations in traditional finance.

“Companies have real challenges with making sure that the code of ethics against insider trading – which is something almost every company has – is actually being followed rather than being a newspaper,” said Mr. Rapaport. bare paper.

Securities and Exchange Commission Chairman Gary Gensler said on Monday that he has seen similarities between the influx of individual investors into the cryptocurrency market and the stock boom of the years. 1920 before the Great Depression, which led to the creation of the SEC and its mission to protect investors. “The retail public penetrated deeply into the market in the 1920s, and we have seen how that emerges,” Mr. Gensler said. “Don’t let someone say, ‘Well, we don’t need protection from fraud and manipulation.’ That’s where you lose faith in the markets.”

A spokesperson for the exchange said they have policies in place to ensure that their employees cannot trade sensitive information.

A Binance spokesperson said that employees have 90 days to hold any investment they make, and that leaders in the company are required to report any trading activity quarterly.

“There is a long-standing process in place, including internal systems, that our security team follows to investigate and hold accountable those who have engaged in this type of behavior, termination immediate impact would be minimal,” she said.

FTX CEO Sam Bankman-Fried said in an email that the company prohibits employees from trading on or sharing information regarding upcoming token listings and has policies in place to prevent that. The transaction highlighted in Argus’ analysis was not the result of any substantial breach of company policy, said Bankman-Fried.

Write to Ben Foldy at and Caitlin Ostroff at

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