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What is Insider Trading? Why Should Crypto Networks Discourage it?

When it comes to cryptocurrencies, insider trading does not go without mention. The subject has been a hot topic in the crypto space to the extent of media outlets. Popular cryptocurrency exchanges such as Coinbase have faced lawsuits due to allegations of insider trading.

Over the years, the government has not set measures against organizations that take part. But, the CFTC’s current enforcement practices encompass cryptocurrencies. The regulation will be the same as that applied to securities by the SEC. This article will look into what insider trading entails. It will also look into why crypto networks should discourage it.

What is Insider Trading?

There is no specific definition of insider trading; however, there are three ways to be found liable for the activity in the United States. The first is a classic material, where one knows non-public information about a particular company. It would work if you were an insider and trading that information.

The second is tipper liability. When someone has confidential information about a company, they tip a person likely to trade the lead. The third is tippee liability. It entails exchanging information on a tip from someone who keeps non-public information about a company.

Although, trading on material, non-public information is not a violation of United States securities laws per se. One might overhear strangers talking about such information, and does not prevent one from lawfully trading a company’s security.

Why Crypto Networks Should Discourage Insider Trading

In crypto markets, participation in insider trading can allow you to gain numerous advantages in the market. Here is why crypto networks should discourage insider trading:

Unfair Markets

When it comes to insider trading, few people receive the information as it is non-public. This factor undermines confidence in the crypto market, discouraging retail investors from the rigged markets.

The insiders with confidential information about the market will have the upper hand. They can avoid losses and gain from market shifts, eliminating investors’ inherent risk in the crypto market. The cryptocurrency market is still young and requires trust from investors as it goes mainstream.

If there are doubts, the public will give up on crypto. And, both companies and the broad network will have difficulty raising funds. Eventually, there might be few outsiders hence insider trading could eliminate itself.

Full Value Loss

Insider trading prevents genuine investors from getting the total value of their investment. For instance, if the confidential information spreads before insider trading occurs, the crypto market integrates information, benefiting everyone.

For example, a crypto-related company could have a new launch, but the information was not public the following week. An investor could use insider information to their benefit, purchasing the cryptocurrency before the information release.

After the announcement, the prices will rally hence allowing them to make a considerable profit by selling. When compared to an investor who had no prior information, they would not gain as much.

Insider Trading is Illegal

Insider trading was made illegal through court interpretations with other laws such as the Securities Exchange Act of 1934. It is only legal if the developers in charge of the company disclose their activities to the SEC. The Securities and Exchange Commission then releases the information to the public.

Insider trading did not apply to Congress members for several years, profiting lawmakers from the 2008 financial crisis. The public raised concerns about the issue, and hence, government officials added it to the law in 2012.

Transparency Alteration

Most crypto companies pride themselves on their transparency such that investors have access to all information similarly. Also, their transactions happen openly, with all the information public.

It will not sit well with investors that some of them are receiving information that they are profiting from, even though they have equal rights to the data. Hence, this goes against the transparency feature promised for all users.

However, insider trading does not have any adverse effects on markets, given that a lot of transactions take place daily in crypto markets.

Information Theft

Exploiting non-public information to benefit in crypto markets is technically theft of the information. The company with bridged data has a stronger claim to be a fraud victim, as it’s their information stolen and used for personal gain. The charge might hold for those who disclosed the information. However, it is difficult to see how the company is a victim of fraud when its shareholders take part in the trading.

What Rules Apply in Crypto Trading?

What should the regular crypto trader be aware of to stay on top of the rules? To begin, even if you are not in the US and are trading cryptos outside of the US, the SEC or CFTC may still pursue you if they believe you are utilizing insider knowledge to sell digital assets in the US market. There have been numerous cases where the SEC has sued individuals living in other countries for insider trading in securities traded in the United States.

Despite these few seeming black-and-white circumstances, insider trading law exists in the shades of gray. When regulators believe a collection of events may indicate insider trading, they are frequently eager to initiate an expensive and intrusive inquiry; even transactions conducted in good faith may be subject to regulatory examination. The application of ever-changing norms to ambiguous factual events creates traps for the unwary.

Conclusion

Insider trading law is highly complex, adding to the complication of crypto trading products, with most untested and unresolved. However, insider trading enforcement in bitcoin product marketplaces is on the way.

Traders, mainly insiders, should be cautious and seek advice, despite the costs attached to good legal counsel. However, failing to seek guidance before trade and defending a lawsuit from the SEC or CFTC can have far-reaching consequences.

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Meanwhile, crypto networks should discourage insider trading as it does more harm than good. Yet, it is worth noting that global participation is necessary to encourage mainstream crypto adoption.

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