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Preventing Crypto Insider Trading: A Guide

Solidus Labs
October 13, 2022

Executive Summary

  • When the U.S. Securities and Exchange Commission (SEC) brought its first-ever crypto insider trading charges in July 2022, it asserted that nine of the 25 cryptocurrencies that the defendants traded were securities. 
  • Should the SEC prevail in this claim or others like it, exchanges, broker-dealers, and other market participants engaging with these digital assets would be expected to monitor for employee/customer insider trading. 
  • Moreover, the DOJ is prosecuting individuals engaged in these schemes with wire fraud, not relying on a strict securities law definition of insider trading. Employers need to have policies prohibiting the schemes and tools in place to detect them.
  • If one of the bills in Congress that define “digital commodities” takes effect, the Commodity Futures Trading Commission (CFTC) will have similar expectations of intermediaries offering Bitcoin, Ethereum, and other non-security cryptocurrencies.
  • Crypto regulators in other jurisdictions, like Bahrain, Gibraltar, Malta, Serbia, and Thailand have anti-market manipulation requirements that include explicit crypto insider trading prohibitions.
  • In our one-pager, we explain how crypto companies can stay ahead of crypto’s insider trading threat.

How common is crypto insider trading?

Earlier this year, researchers at the University of Technology Sydney estimated that insider trading occurs in 10% to 25% of all crypto listing announcements. In the stock market, by comparison, insider trading is estimated to occur in 20% of mergers and acquisitions and 5% of quarterly earnings announcements. This suggests that stocks and cryptocurrencies are traded by insiders at a similar rate.

Insider trading is also a challenge in the NFT space, with one recent case involving the illicit trade of 45 different NFTs.

How is the U.S. handling crypto insider trading?

Department of Justice (DOJ)

In October 2021, the DOJ announced the creation of a National Cryptocurrency Enforcement Team. Since then, the team has demonstrated its willingness to pursue individuals engaging in both crypto and NFT insider trading. 

In June 2022, the DOJ brought NFT insider trading charges against a former OpenSea employee for buying NFTs he knew would be featured on the marketplace’s homepage; in July, it brought crypto insider trading charges against a former Coinbase employee, his brother and a friend for buying dozens of cryptocurrencies just before they were listed on the exchange. In the latter case, Coinbase had policies in place to prevent insider trading, shared its findings proactively with the DOJ, and was commended by the agency for its cooperation.

The Securities and Exchange Commission (SEC)

The SEC’s crypto enforcement team –  the Crypto Assets and Cyber Unit – doubled in size in 2022, and brought its first crypto insider trading charges alongside the DOJ in July. The regulator claimed within its complaint that nine of the cryptocurrencies in question were securities (i.e. “investment contracts”), and that the accused therefore violated Section 10(b) and Rule 10b-5 of the Securities Exchange Act. In the agency’s accompanying press release, Division of Enforcement Director Gurbir S. Grewal added: “Rest assured, we’ll continue to ensure a level playing field for investors, regardless of the label placed on the securities involved."

The Commodity Futures Trading Commission (CFTC)

After the passage of the Dodd-Frank Act in 2011 strengthened the CFTC’s regulatory powers, the agency promulgated Rule 180.1, a statute modeled after SEC Rule 10b-5. The agency has since invoked the rule in a number of insider trading cases and formed a task force dedicated to its enforcement.

While the CFTC has yet to announce any crypto insider trading cases, it may have the authority to bring them against traders of certain tokens. If one of the bills in Congress that define cryptocurrencies like Bitcoin and Ethereum as “digital commodities” passes into law, the Commodity Futures Trading Commission (CFTC) may soon have authority over all exchanges offering those crypto-commodities.

Per CFTC Rule 1.51, commodities-focused SROs including commodity exchanges and registered futures associations are required to “monitor market activity and trading practices in their respective markets.” These monitoring expectations may extend to insider trading surveillance.

How crypto insider trading surveillance tools help crypto organizations and regulatory agencies prevent insider trading

Market participants that take an automated approach to risk monitoring can detect insider trading early, before any inquiries, subpoenas, or penalties take place. With Solidus HALO’s insider trading typology, organizations can detect suspicious trades executed either on the blockchain, by crypto wallets on Decentralized Exchanges (DEXs), or off the blockchain, by account holders at Centralized Exchanges (CEXs). These suspicious trades are automatically assigned a risk score and aggregated by wallet address or entity name into a single unified case. Your compliance or investigations team can then examine each token swap or trade in detail to determine whether or not to escalate. 

Sign up for Solidus demo if you think our crypto insider trading detection tool could help your organization.

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