Comment by: Nick Pickerin, Founder of Coin Bureau
The biggest liquidation event in crypto market history wiped out at least $19 billion in long positions after US President Donald Trump announced punitive tariffs on China late on October 10, exposing an ugly side of the nascent market: its risk of insider trading.
Onchin data shows that a significant short position was taken on Hyperlysac just half an hour before the big announcement. Once the market crashed, the trader netted $160 million, prompting speculation of market manipulation — with some even theorizing that the “wheel” behind the transaction was close to the presidential family.
Speculation aside, this is just one of many examples of potential insider trading in the digital asset space, which plagues the industry. Indeed, token launch models themselves deserve scrutiny, as they often sell to venture capital firms what they sell on listings, to the detriment of retail traders. For all its progress, crypto remains the “wild west” – largely unregulated and open to market manipulation.
This massive problem is not unique to crypto. It is as old as the markets themselves. Financial regulations have tried and failed to eradicate it for decades. This is a problem that has nothing to do with blockchain technology: it is simply a manifestation of human greed.
The transparency of blockchain technology has exposed the market’s dirty laundry, and served as a wake-up call to regulators to take serious action in cleaning it up.
Rules that are preferred
The history of financial markets is replete with instances of insider trading and market manipulation that have gone unpunished. The most important is the global financial crisis, whose key actors were convicted of their massive wrongdoing despite overwhelming evidence. That includes the top brass at Lehman Brothers, who fled to sell their stock as the company collapsed — all because prosecutors failed to prove intent under existing laws.
Related: How an Anonymous Trader Made $192 Million Shorting One of the Biggest Crypto Crashes Ever
In the years since, the SEC has reportedly opened more than 50 investigations into derivatives markets, including insider trading involving credit default swaps and possible influence on the 2009-2012 Greek government bond crisis. But no punishment was forthcoming. And thanks, at least in part, to the fact that the law didn’t cover debt derivatives. And the shocking part is that, at least in America, it still isn’t.
Globally there has been little revision of insider trading regulations. Almost a century since they were first introduced under the U.S. Securities Exchange Act of 1934, the changes implemented have been more of a hindrance than a help. In the US, Rule 10B5-1, introduced in 2000, created a loophole for insider trading rather than a fix, and any updates have failed to address today’s more sophisticated market landscape.
A prime example of this is the 2016 Second v. Panwat case, which tested the limits of insider trading law so much that it took eight years to reach a conviction. Matthew Panot, a senior executive at Medivation, a biotech firm acquired by Pfizer, bought call options in rival Inket Corp. after learning of the takeover. His bet is that the increase in the competitor’s shares resulted in a personal profit of more than 100,000.
The SEC is ignoring insider trading
Although Panwat was eventually convicted, so-called “shadow trading” is a nascent area of SEC enforcement, and it’s technically not yet written into law. But it should be. The rules as they stand are not fit for purpose in a market that looks nothing like it did 50 years ago, so now is the time to upgrade.
This means officially expanding the scope of the law to cover a wide range of investment instruments, including derivatives and digital assets, and updating the definition of insider information to include official channels, policy briefings and other sources. This means strengthening pre-disclosure and cooling-off periods for public officials and aides, similar to the existing 10B5-1 reforms.
Additionally, Implementation needs to be significantly faster. Eight years for a sentence is not very good in a world where billions can be wasted in seconds.
Regulators need to come down hard on insider trading using the latest tools that fraudsters have at their disposal.
The crypto market is certainly no exception. Now is the time to investigate the powers that be with token launches, exchange listings and digital asset treasury fever deals. Honest actors in space would only welcome it.
Litigating this as a crypto-related issue, however, would be a huge mistake. Until the law is modernized and loopholes closed, insiders will continue to exploit them, and trust in the system will erode.
Only when wrongdoers fear the consequences of their actions will the traditional and digital asset markets really change.
Comment by: Nick Pickerin, Founder of Coin Bureau.
This article is for general information purposes and is not intended and should not be construed as legal or investment advice. The views, opinions and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of QuintalGraph.
