How to Avoid Insider Trading in Cryptocurrency | A Guide
Introduction
Insider trading is a serious problem for the cryptocurrency market and can lead to significant financial losses for investors. In simple terms, it is when someone uses nonpublic information to gain an unfair advantage over other traders in the market. The problem is especially prevalent in the crypto world as it is largely unregulated and open to manipulation.
Unfortunately, many people take advantage of this lack of regulation to engage in illegal profiteering. It can be hard to identify insider trading, as perpetrators often operate in a discreet manner. However, there are some steps you can take to protect yourself and your investments from potential insider trading. In this guide, we'll provide an overview of how to avoid insider trading in the cryptocurrency market.
How is Crypto Affected by Insider Trading?
There are few well-established procedures and processes in the realm of cryptocurrencies. Additionally, the majority of cryptocurrencies don't fall within the SEC's definition of investments. But it appears that SEC-registered assets are not the only ones to which insider trading laws apply. And not knowing the law is not a valid excuse.
The Department of Justice declared at the beginning of June that it would file charges against Nathaniel Chastain of OpenSea. It's claimed that Chastain surreptitiously purchased some of the NFTs that would be displayed on the platform's homepage. Chastain was in charge of making that decision. When the prices rose, he then benefited.
US Attorney Damian Williams believes that while NFTs may be a recent development, this kind of criminal activity is not. According to the allegations, Nathaniel Chastain betrayed OpenSea by utilizing its proprietary company knowledge for personal gain. The charges filed show how dedicated this Office is to eradicating insider trading, whether it takes place on the stock market or a blockchain."
People purchasing cryptocurrencies just before they list on significant cryptocurrency exchanges is another area that is coming under investigation. For those who are aware in advance, this might be a quick way to generate money because prices frequently rise after new listing announcements. According to a recent report by Fox News, the SEC has written to multiple exchanges to request additional information. We might witness additional insider trading accusations involving digital assets if authorities can demonstrate that exchange workers are trading based on confidential listing information.
Exactly How Insider Trading Harms Cryptocurrency Investors
Insider trading in the stock market creates an unfair playing field and can harm regular investors, which is why the SEC cracks down on it severely. Fundamentally, insider trading undermines confidence in the NFT and cryptocurrency markets. It basically means that you can't be certain that when you buy cryptocurrency or an NFT, the price hasn't already been artificially driven up by somebody who unfairly has the information you don't.
Crypto exchanges claim to have procedures in place to prevent staff from using proprietary information for personal gain, but it's unclear how stringent these procedures are or how serious the issue is. For instance, Argus, a crypto compliance business, revealed details of a study in The Wall Street Journal. It revealed that 46 separate cryptocurrency wallets had purchased a certain token just before it was listed on many exchanges. Only one token listing was used in the trades, which resulted in a profit of almost $1.7 million.
How Common is Cryptocurrency Insider Trading?
Insider trading is illegal profiteering, and it has become increasingly prevalent in the cryptocurrency market. Many investors are taking advantage of their privileged position to buy and sell digital assets before the general public knows about them, which leads to unfair pricing and can have a damaging effect on the overall market. While it's difficult to accurately estimate the prevalence of insider trading in crypto, it's clear that it is a growing problem.
Insider trading takes place in 10% to 25% of all cryptocurrency listing announcements, according to research by academics at the University of Technology Sydney. 5% of quarterly earnings announcements and 20% of mergers and acquisitions are thought to include insider trading in the stock market, respectively. This implies that the rate at which insiders trade stocks and cryptocurrency is comparable.
Fortunately, there are steps investors can take to reduce their risk of becoming involved in insider trading, such as avoiding any asset whose pricing may be influenced by insider information or establishing strict limits on trading. With the right safeguards in place, investors can help ensure that the crypto market remains fair and accessible to all.
How is the Us Managing Insider Trading in Cryptocurrency?
Department of Justice (DOJ)
The DOJ announced the formation of a National Cryptocurrency Enforcement Team in October 2021. Since then, the team has shown that it is willing to go after people who are trading NFT and cryptocurrency insiders.
The DOJ filed charges in July 2022 against a former Coinbase employee, his brother, and a friend for purchasing a number of cryptocurrencies just before they were listed on the exchange. In June 2022, the DOJ filed charges against a former OpenSea employee for purchasing NFTs he knew would be featured on the marketplace's homepage. In the latter instance, Coinbase had systems in place to avoid insider trading, promptly informed the DOJ of its discoveries, and received praise from the department for its cooperation.
The Securities and Exchange Commission (SEC)
The Crypto Assets and Cyber Unit, a division of the SEC that oversees cryptocurrency enforcement, more than doubled in size in 2022 and filed its first accusations of crypto insider trading in July, working with the DOJ. Nine of the cryptocurrencies in question, according to the regulator's complaint, were securities (i.e., "investment contracts,") and as a result, the accused had breached Section 10(b) and Rule 10b-5 of the Securities Exchange Act.
The Commodity Futures Trading Commission (CFTC)
Following the Dodd-Frank Act's strengthening of the CFTC's regulatory authority in 2011, the agency issued Rule 180.1, a law based on SEC Rule 10b-5. Since then, the government has used the rule in a number of insider trading instances and established a task force to enforce it.
Although the CFTC hasn't yet taken any insider trading actions involving cryptocurrencies specifically, it may soon have the power to do so for some of them. The Commodity Futures Trading Commission (CFTC) may soon have control over all exchanges providing those crypto-commodities if one of the measures in Congress that classify cryptocurrencies such as Bitcoin and Ethereum as "digital commodities" is passed into law.
How Might Monitoring Crypto Insider Trading Help Businesses Stop the Illegal Activity?
In conclusion, insider trading in cryptocurrency is illegal and should be avoided at all costs. This kind of profiteering not only harms the integrity of the markets but can also carry serious legal consequences. Investors should always take care to adhere to the laws and regulations surrounding cryptocurrency trading. By conducting due diligence before investing and monitoring their investments, investors can ensure that they are making informed and ethical decisions that will protect them from any illegal profiteering.
Tips to Avoid Crypto Insider Trading
In order to avoid insider trading in cryptocurrency, it is important to be aware of a few key tips.
First, be aware of insider trading laws. While they may differ slightly from country to country, the overall intent is the same – protect fair trading practices and maintain market integrity. For example, in the US, insider trading is illegal according to Rule 10b-5 of the Securities Exchange Act of 1934. This law prohibits "trading on material nonpublic information," which means using inside information to make profitable trades.
Second, stay informed on all news related to the cryptocurrency market. If you come across a piece of news that could potentially impact the price of a cryptocurrency, investigate further before investing or trading. This will help you make sure that you are not trading based on inside information that could lead to illegal profiteering.
Finally, keep track of your trades and be wary of any unusual activity. If you notice sudden and large shifts in the price of a cryptocurrency that seems suspicious, it is best to wait until the situation is clearer before making a trade. This will ensure that you are not participating in any illegal activities related to insider trading.
By following these tips, you can help ensure that your trades are fair and that you are not engaging in illegal profiteering. With increased awareness of insider trading laws and vigilance in tracking your trades, you can help protect yourself from potential fraudulent gains.
Conclusion
In conclusion, insider trading in cryptocurrency is illegal and should be avoided at all costs. This kind of profiteering not only harms the integrity of the markets but can also carry serious legal consequences. Investors should always take care to adhere to the laws and regulations surrounding cryptocurrency trading. By conducting due diligence before investing and monitoring their investments, investors can ensure that they are making informed and ethical decisions that will protect them from any illegal profiteering.