SEC Writes to Crypto Exchanges About “Insider Trading Safeguards”

Key Insights:

• Several US crypto exchanges received an inquiry from SEC regarding protection against insider trading.
• The move signals that the SEC is concerned about regulatory violations amid the crypto market meltdown.
• Last month, an Argus report noted that many prime suspects for insider trading came to light.

How cryptocurrency exchanges prevent the leaking of market-sensitive information has become a growing topic of concern. Regulators across the globe have been raising questions about market integrity for retail consumers.

Just weeks ago, Nathaniel Chastain, a former product manager of Ozone Network, otherwise known as OpenSea, was charged with insider trading in non-fungible tokens (NFTs). The investigation involved the FBI and the National Cryptocurrency Enforcement Team.

SEC wants to double-check on insider trading safeguards

Now, the US Securities and Exchange Commission (SEC) has involved itself in ensuring that crypto exchanges comply with anti-insider trading rules and have enough protection.

According to Fox Business, an unnamed source familiar with SEC’s moves in this regard said that the watchdog has sent letters to crypto exchanges inquiring whether they have proper safeguards to curb insider trading incidents.

Put simply, insider trading means when someone uses non-public insider information of a company to buy or sell financial assets that aren’t listed yet. 

For instance, in April, an Ethereum (ETH) wallet allegedly bought roughly $400,000 worth of tokens that were not yet listed on Coinbase (COIN) at the time.

Found an ETH address that bought hundreds of thousands of dollars of tokens exclusively featured in the Coinbase Asset Listing post about 24 hours before it was published, rofl pic.twitter.com/5QlVTjl0Jp

— Cobie (@cobie) April 12, 2022

In this case, the purchases took place three minutes before Coinbase’s official announcement, raising the question among speculators whether this was luck. However, the exchange did not list the tokens, raising suspicion among the community. 

Such incidents have called regulators to scrutinize acts of insider trading in crypto exchanges.

Per the source, the letter has supposedly been sent to multiple exchanges. However, the SEC did not mention which exchanges were involved. Fox Business had contacted top crypto exchanges – Binance, Coinbase, FTX, and Crypto.com – all declined to comment. 

The SEC too, failed to confirm the probe when asked. Although the news comes unofficially through a source, the probe aligns with SEC chair Gary Gensler’s comments in May. In an interview, he noted, 

“Crypto’s got a lot of those challenges – of platforms trading ahead of their customers. In fact, they’re trading against their customers often because they’re market-marking against their customers.”

It is also unknown which division of the SEC is involved in the probe, the Fox news report noted.

The act comes at a time when the crypto market is facing increased pressure. Bitcoin (BTC), the largest cryptocurrency by market cap, plunged to below $23K, bringing down the value of the entire crypto market to lower than $1 Trillion.

What do exchanges say?

An analysis performed by Argus Inc., suspected several anonymous crypto investors of insider trading. They allegedly got to know when tokens would be listed on exchanges.

A recent Wall Street Journal report found 46 wallets that purchased a combined $17.3 million worth of tokens listed shortly after on Coinbase, Binance (BNB), and FTX (FTT).

Coinbase noted that they had a compliance policy prohibiting employees from trading on privileged information. Additionally, it also conducts regular analyses to ensure fairness in trading.

Coinbase CEO Brian Armstrong recently wrote in a blog post,

“There is always the possibility that someone inside Coinbase could, wittingly or unwittingly, leak information to outsiders engaging in illegal activity. We have zero-tolerance for this and monitor for it, conducting investigations where appropriate with outside law firms.”

A Binance spokeswoman told WSJ that employees have 90 days to hold on to investments, which security leaders monitor. She noted,

“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, immediate termination being minimal repercussion.”

FTX, too acts immediately over such violations and has explicitly banned its employees from trading on upcoming tokens listings. The company CEO Sam Bankman-Fried noted in a mail that FTX has relevant policies in place to prevent such acts.