Insider trading is a serious offense for which the crypto community has very little sympathy.
It occurs when unscrupulous individuals take advantage of their privileged position and place their thumb on the scale, stealing from honest traders to further enrich themselves.
This scourge on the crypto community is incredibly prevalent, with research showing that over half of all ERC-20 tokens show some signs of insider trading.
This article will examine the cases where powerful people were accused of being Robin Hood in reverse — stealing from the poor to give to the rich.
OpenSea
In September 2021, the non-fungible (NFT) marketplace OpenSea became embroiled in a first-of-its-kind insider trading scandal, making the history no crypto company aspires to make.
OpeaSea’s head of product, Nate Chastain, was accused of using his insider knowledge to purchase NFTs in collections he knew would soon be featured on the site’s homepage and consequently spike in trading volume and value. Chastain would then flip the NFTs he purchased for financial gain.
In total, Chastain made $57,000 from his trades. It must have seemed like easy money until users got suspicious and OpenSea investigated.
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During the court case, Chastain publicly apologized to OpenSea and said, “I let down the company I was serving and lost sight of the person I aspired to be.”
In May 2023, Chastain was convicted of fraud and money laundering. He received a three-month custodial sentence.
In January 2023, Chastain announced he would appeal his conviction on the grounds that the information he used to profit off NFTs on OpenSea “had no commercial value” and was not considered “protected property.”
BitMEX founders
In 2022, BitMEX co-founders Arthur Hayes, Benjamin Delo and Samuel Reed pled guilty to violating the Bank Secrecy Act by failing to establish adequate Anti-Money Laundering controls.
Hayes was sentenced to six months of house arrest plus two years of probation, while Delo and Reed received 30 months and 18 months of probation, respectively. Each paid a $10 million fine, totaling $30 million.
This is not the only legal case brought against BitMEX and its three founders.
HDR Global Trading Limited, which owns BitMEX and whose name is an acronym of the three founders’ surnames — Hayes, Delo and Reed — is facing a class-action lawsuit that alleges the firm had an insider trading desk with unfettered access to customer information and accounts.
The lawsuit further alleges that this “god access” to customer accounts allowed the BitMEX insider trading desk to manipulate the market to cause the maximum number of customer liquidations.
Material nonpublic information (MNPI) is the type of information that actors can use for insider trading. Source: Solidus Labs
Once customer accounts were liquidated, BitMEX allegedly seized their cash and placed it in an “insurance fund,” accessing the money as and when it liked.
The case argues that BitMEX acted as a honeytrap, enticing customers to trade on the exchange while surreptitiously acting against their best interests.
In April 2024, a judge denied BitMEX’s motion to dismiss the lawsuit. The civil case will now proceed against BitMEX, Hayes, Delo and Reed.
Coinbase employees
In July 2022, the United States Securities and Exchange Commission and the Department of Justice (DOJ) brought charges against three Coinbase employees: Coinbase Global product manager Ishan Wahi, his brother Nikhil Wahi, and Sameer Ramani.
Over 10 months, from June 2021 to April 2022, Ishan used his position of authority and trust to tip off his brother and their friend Ramani as to which cryptocurrencies would next be listed on the exchange. Naturally, this information was supposed to remain confidential.
On at least 14 separate occasions, the trio purchased 55 cryptocurrencies before their public listing announcements, profiting to the tune of $1.5 million. However, those profits were short-lived.
Following their arrests and court appearances, Nikhil was sentenced to 10 months in prison and ordered to forfeit $892,500. Ramani was ordered to pay a disgorgement totaling $817,602 and also received a civil penalty of $1,635,204.
Following a guilty plea on May 9, 2023, Ishan was sentenced to two years in prison.
Upon its conclusion, the DOJ described it as “the first ever cryptocurrency insider trading case” — an unenviable record for Ishan and his cohorts.
Solidus’ damning DeFi report
While high-profile incidents of insider trading are bad enough, there are also many smaller examples that go largely unnoticed.
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In June 2023, Solidus Labs released a report on insider trading dating back to January 2021. It concluded that 56% of the ERC-20 tokens traded showed signs of insider trading.
“The pseudonymity of DEX [decentralized exchange] trading, coupled with the fact that crypto assets are often listed on DEXs and other CEXs [centralized exchanges] well before they are listed on major exchanges, increases the appeal – and therefore the frequency – of insider trading in crypto assets relative to stocks.”
As Chen Arad, co-founder of Solidus, told Bloomberg at the time, “If more than half of all tokens listed are not ones you can buy in trust, it’s a less effective market.”
For retail customers who have played the game and lost, these examples of market manipulation and malfeasance serve as an important reminder that crypto is often an insider’s game.