Cryptocurrency is a new financial frontier, offering the chance to invest in emerging technologies and markets. For many, cryptocurrency is the exciting “next big thing,” an opportunity to democratize investing and engage in anonymous, or semi-anonymous, trades. However, despite the relative lack of oversight and traditional structures of cryptocurrency, there are still several limitations on the market.
Cryptocurrency, while digitized and decentralized, is still not entirely lawless. While mainstream cryptocurrencies such as Bitcoin and Ethereum are not considered securities, the ways in which they are traded and exchanged may still be governed by securities law.
Cryptocurrency insider trading started being prosecuted under US law. If you have information about trades made based on material, non-public information, and done through an exchange, that information may qualify you to become a whistleblower. Whistleblowers can receive significant payouts from the federal government through the SEC Whistleblower Program, which is designed to reduce fraud and increase transparency in financial markets. Speak to a crypto fraud attorney today to find out if your information is eligible for a reward and to be protected under federal whistleblower law.
What is Crypto Insider Trading?
Cryptocurrency insider trading is similar to traditional insider trading, with several exceptions.
In general, cryptocurrency is not considered to be a security under US law and is therefore not subject to the same kinds of rules and regulations. There are exceptions, however, for cryptocurrencies that offered ICOs (Initial Coin Offerings) and/or IEOs (Initial Exchange Offerings). For instance, the Telegram Open Network, a cryptocurrency offering from chat platform Telegram, was shut down by SEC injunctions due to problems with its initial coin offering. The SEC argued that this ICO, worth approximately $1.7 billion, was an example of an unregistered securities offering and was therefore deemed illegal. The company was forced to shut down their program and pay a fine of $18.5 million.
While the Telegram ICO decision faced significant backlash, including from SEC Commissioner Hester Peirce, it is important to note that trades conducted for the Telegram ICO based on tips or other non-public information could have been subject to SEC prosecution and deemed insider trading. Anytime a new cryptocurrency’s ICO or IEO is considered to be a security, trades made based on material non-public information may create liability.
Crypto Insider Trading Liability
In general, crypto insider trading happens in one of three ways:
- Classic liability: Someone may be found liable for insider trading if they possess non-public, material information about a company (often one that they work for) and conduct securities or stock trades based on that information.
- Tipper liability: With tipper liability, someone possesses material, non-public information that they are supposed to keep private, but they share that tip with someone else who then makes a trade based on this knowledge. An example might be a Board Executive who receives a confidential report about their business but tells their spouse to sell their shares in the company based on the report’s information.
- Tippee liability: In the previous example, the spouse who made the trade based on the private information in the business’s report would also be considered liable for conducting insider trading.
Is Crypto Insider Trading Illegal?
Crypto insider trading is illegal and subject to prosecution under US law. The field is still evolving, especially as new cryptocurrencies arrive on the scene and are classified differently than initial financial technologies like Bitcoin and Ethereum.
In July of 2022, three people were charged in the Department of Justice’s first-ever crypto insider trading enforcement action. According to U.S. Attorney Damian Williams, “Today’s charges are a further reminder that Web3 is not a law-free zone. Just last month, I announced the first-ever insider trading case involving NFTs, and today I announce the first-ever insider trading case involving cryptocurrency markets. Our message with these charges is clear: fraud is fraud is fraud, whether it occurs on the blockchain or on Wall Street.”
In this recent case, a former product manager at Coinbase, one of the largest cryptocurrency exchange markets in the world, was charged for allegedly providing an inside tip to either his brother or a friend, so that they could acquire certain crypto assets before they were set to be listed on the exchange. Cryptocurrencies traditionally acquire much more value once they are formally listed on Coinbase or on other exchange markets. In this scheme, the three allegedly colluded to invest in certain cryptocurrencies before they were announced, leading to a profit of approximately $1.5 million. These investments took place using anonymous Ethereum blockchain wallets.
This new enforcement action shows that the Department of Justice can now consider certain kinds of trading in the cryptocurrency sphere to be done under “insider” conditions, especially when they take place on public exchanges. These exchanges are subject to SEC regulations, including the imposition of monetary fines, as well as the possibility of imprisonment.
Additional Types of Crypto Fraud
Besides insider trading, there are other kinds of crypto fraud that may be subject to regulation, such as:
- Pump and dump schemes: In pump and dump schemes, misinformation spreads about a new coin’s value, often via social media. In 2021, these scams, also known as “rug pulls,” were assessed at $2.8 billion of cryptocurrency, accounting for 37 percent of known crypto scams. This represents a substantial increase from just one percent in 2020, according to data firm ChainAnalysis.
- Initial coin offerings: Fraudulent ICOs can often be spotted due to a lack of white papers, unnecessarily complex language, or even completely fabricated founders or team members. Do your research on new kinds of cryptocurrency before investing in an ICO. If you suspect an ICO may be fraudulent, you can report it to the SEC and may even qualify as a whistleblower if your information helps lead to a recovery of funds.
- Ponzi schemes: Ponzi schemes are one way that scam artists pull in more investors to fund false promises.
- Deceptive influencers: Even mainstream names, like Kim Kardashian and boxer Floyd Mayweather, have been implicated in lawsuits involving artificially inflated cryptocurrencies. These kinds of scams can happen even with more mainstream crypto currently considered to be a safer bet, such as Ethereum.
- Market Manipulation: Market manipulation on exchanges with non-public information can be considered a form of insider trading.
- Theft: Cryptocurrency is particularly vulnerable to hacking, especially when assets are held in digital wallets.
How to Report Crypto Fraud
To report crypto fraud, speak to a whistleblower lawyer today. They can help you understand which laws your information may fall under and how you can best be protected as a crypto whistleblower. Under certain circumstances, your information may qualify you for a significant financial reward.
The SEC Whistleblower Program is conducted under complete anonymity to protect whistleblowers. Acting through a crypto whistleblower law firm can help ensure that your identity is protected and that your rights are protected in the event of any leak or illegal harassment as a result of your protected disclosure.
Speak to a Crypto Whistleblower Lawyer Today
If you have information about crypto insider trading or any other kind of cryptocurrency fraud or scam, contact an experienced crypto whistleblower lawyer. The world of financial technology is fast evolving, and the law is evolving with it. In order to know what kinds of whistleblower rewards and protections may apply in your situation, you need an expert crypto law firm by your side.