Insider Trading Is Rampant in Cryptocurrency — Retail Traders Bear the Brunt

U.S. law officially criminalized insider trading in the stock market in 1988 under former President Ronald Reagan. Nearly two-and-a-half decades later in 2012, former President Barack Obama signed the STOCK Act into law, which made it illegal for members of Congress to trade securities on non-public information. With the rise of cryptocurrency, the lack of regulation is causing issues, one of which is insider trading.

The crypto insider trading problem is blatant, with numerous reports of crypto wallets making big purchases, only to sell once the digital asset hits crypto exchanges. Retail traders are bearing the brunt of it.

According to reports from The Wall Street Journal, an anonymous owner of a cryptocurrency wallet acquired $360,000 in Gnosis coins over a period of six days in August 2021. Gnosis is a decentralized finance (DeFi) ecosystem. Gnosis has its own token, GNO, which trades on the Ethereum blockchain.

Just a day after the crypto wallet finished its Gnosis buying spree, major crypto exchange Binanace announced it would list GNO for Binance users to trade. Naturally, the price of GNO went up by about 40 percent and the anonymous investor sold, raking in a $140,000 profit.

The former head of product at major NFT marketplace OpenSea, Nate Chastain, stepped down from his role in September 2021 over accusations that he was trading NFTs based on insider information. His alleged insider trading actions, also called front running, involved buying NFTs at a low price based on non-public information and selling them at a profit.

Cryptocurrency markets are considered the regulatory wild west — and for good reason. While DeFi offers greater freedom for people to use the assets when and how they want, there are two sides to every crypto coin.

There's plenty of good that comes from crypto, like the fast donations that went to Russia-invaded Ukraine when banking systems weren't reliable. However, SEC Chair Gary Gensler once said that cryptocurrency as a whole is “rife with fraud, scams, and abuse.” That juxtaposition can't be denied.

Until the government is able to successfully regulate the crypto market, which inherently prioritizes a lack of regulation, insider trading may be a given.

Companies in the cryptocurrency industry have set ethics regarding trading assets on non-public information. They usually prohibit employees at the company from insider trading. However, as Argus CEO Owen Rapaport told reporters, “Firms have real challenges with making sure the code of ethics against insider trading — which almost every firm has — is actually followed rather than being an inert piece of paper.” Without a legal backbone — and with the hurdle of anonymous, virtually untraceable crypto wallets — it's difficult for companies to enforce these standards.

As of late May, cryptocurrency is in a hefty downturn. In February, even before the most recent losses, more than half of all Bitcoin (BTC) investors had lost money on their initial investment. That doesn’t even include the thousands of altcoins that exist, many of which are smaller in scale and more greatly impacted by whales (individual wallets that hold a large chunk of crypto, which can cause the asset’s value to plummet if sold at once).

Likewise, crypto insider trading impacts average crypto retail traders more than the big-time investors. While front runners make off with a profit, subsequent investors may go deep in the red.

It's hard to find a decentralized cryptocurrency standard and a safe one. Until we do, crypto insider traders will likely flourish.