Insider knowledge of token listings boosted crypto investors

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Public data suggests that several anonymous crypto investors took advantage of insider knowledge of when the tokens would go public.

For six days last August, a crypto wallet amassed a $360,000 stake in Gnosis coins, a token tied to an effort to create blockchain-based prediction markets. On the seventh day, Binance – the world’s largest cryptocurrency exchange by volume – said in a blog post that it would list Gnosis, allowing it to be traded among its users.

Token listings add both liquidity and a stamp of legitimacy to the token, and often give a token’s trading price a boost. The price of Gnosis rose sharply from around $300 to $410 within an hour. The value of Gnosis traded that day reached more than seven times its seven-day average.

Four minutes after Binance’s announcement, the wallet began selling its stake, liquidating it entirely in just over four hours for just over $500,000 – making a profit of around $140,000 and a return of $100,000. around 40%, according to an analysis by Argus, a company that offers companies software to manage employee exchanges. The same portfolio demonstrated similar patterns of buying tokens before their announcements and selling quickly after with at least three other tokens.

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The crypto ecosystem is increasingly grappling with headaches that the world of traditional finance grappled with decades ago. The collapse of a so-called stablecoin from its dollar peg earlier this month stemmed from the crypto version of a bank run. How cryptocurrency exchanges prevent the leakage of market-sensitive information has also become a growing concern. The attention comes as regulators raise questions about market fairness for retail users, many of whom have just suffered significant losses due to the sharp drop in crypto assets.

The wallet buying Gnosis was among 46 Argus found that purchased a combined $17.3 million worth of tokens that were listed on Coinbase, Binance, and FTX soon after. The owners of the wallets cannot be determined via the public blockchain.

Profits from sales of the visible tokens on the blockchain totaled over $1.7 million. However, the actual trading profits are likely much higher, as several parts of the stakes were moved from wallets to exchanges rather than traded directly for stablecoins or other currencies, Argus said.

Argus focused only on wallets that exhibited repeated patterns of token buying in anticipation of a listing and selling announcement shortly thereafter. The analysis flagged trade activity from February 2021 to April this year. The data was reviewed by The Wall Street Journal.

Coinbase, Binance and FTX each said they have compliance policies prohibiting employees from trading inside information. The latter two said they reviewed the analysis and determined that the business activity in Argus’ report did not violate their policies. Binance’s spokesperson also said that none of the wallet addresses are linked to its employees.

Coinbase said it conducts similar analyzes as part of its attempts to ensure fairness. Coinbase executives have published a series of blogs addressing the issue of front running.

“There is always the possibility that someone inside Coinbase may, knowingly or unknowingly, leak information to outsiders engaging in illegal activity,” Coinbase Chief Executive Brian Armstrong wrote last month. . The exchange, he said, investigates employees who seem connected to front running and fires them if found to have helped such trades.

Paul Grewal, Chief Legal Officer of Coinbase, followed up with a blog after May 19. The company has seen listing information leaked ahead of announcements through traders detecting digital evidence of exchanges testing a token ahead of a public announcement, he said. Coinbase has taken steps to mitigate this in addition to its efforts to prevent employee insider trading, he said.

Wallets like these have sparked debate in the crypto community about whether the targeted purchase of specific tokens before quotes on exchanges indicates insider trading. Crypto markets are largely unregulated. In recent years, regulators have taken a closer look at market equity for individual investors. The biggest cryptocurrency bitcoin fell 24% in May, causing heavy losses for individual investors in the market.

Insider trading laws prohibit investors from trading stocks or commodities on material, nonpublic information, such as knowledge of an upcoming listing or merger offering.

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Some lawyers say existing criminal laws and other regulations could be used to prosecute those who trade cryptocurrencies with private information. But others in the cryptocurrency industry say a lack of case precedent specific to crypto insider trading has created uncertainty about whether and how regulators might seek to tackle it. ‘coming.

Argus CEO Owen Rapaport said internal crypto compliance policies can be undermined by a lack of clear regulatory guidelines, the libertarian ethics of many who work in the space, and a lack of institutionalized standards against insider trading in crypto compared to those in traditional finance.

“Companies face real challenges in ensuring that the insider trading code of ethics – which almost every company has – is effectively followed rather than being an inert piece of paper,” Rapaport said. .

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Securities and Exchange Commission Chairman Gary Gensler said on May 16 that he saw similarities between the influx of retail investors into crypto markets and the stock market boom of the 1920s that presaged the Great Depression, which led to the creation of the SEC and its protection mandate. investors. “Retail audiences had penetrated deep into the markets in the 1920s and we saw how that turned out,” Gensler said. “Don’t let anyone say, ‘Well, we don’t need to protect ourselves against fraud and manipulation.’ This is where you lose faith in the markets.”

Spokespersons for the exchanges said they have policies to ensure their employees cannot exchange sensitive information.

A Binance spokeswoman said employees have a 90-day hold on any investments they make and company executives are required to report all trading activity on a quarterly basis.

“There is a long-standing process in place, including internal systems, which our security team follows to investigate and hold accountable those who have engaged in this type of behavior, with immediate termination being a minimal repercussion,” a she declared.

FTX CEO Sam Bankman-Fried said in an email that the company explicitly prohibits employees from trading or sharing information related to upcoming token listings and has a policy in place to prevent this. The trades highlighted in Argus’ analysis did not result from any material breach of company policy, Bankman-Fried said.

Write to Ben Foldy at ben.foldy@wsj.com and Caitlin Ostroff at caitlin.ostroff@wsj.com

This article was published by The Wall Street Journal, part of the Dow Jones

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