Opinion by: Nic Puckrin, founder of CoinBureau
The largest liquidation event in the history of the crypto market, which wiped out at least $19 billion in long positions after US President Donald Trump announced punitive tariffs on China late on Oct. 10, exposed an ugly side of this nascent market: its vulnerability to insider trading.
Onchain data shows that a significant short position was taken out on Hyperliquid just half an hour before the big announcement. Once the market plummeted, this trader bagged $160 million, sparking speculation over market manipulation — with some even theorizing that the “whale” behind the transaction was close to the presidential family itself.
Speculation aside, this is admittedly just one of many examples of potential insider trading in the digital asset space, which plagues the industry. Indeed, token launch models themselves deserve scrutiny, as they often reward venture capital firms with pre-launch allocations they sell on listing, to the detriment of retail traders. For all its progress, crypto remains the “Wild West” — largely unregulated and open to market manipulation.
This massive problem isn’t crypto’s alone. It’s as old as markets themselves. Financial regulations have tried and failed for decades to put an end to it. It’s a problem that has nothing to do with blockchain technology: It’s simply a manifestation of human greed.
Blockchain technology’s transparency has exposed the market’s dirty laundry, serving as a wake-up call for regulators to take serious action in cleaning it up.
Rules that favor the favored
The history of financial markets is rife with instances of insider trading and market manipulation that have gone unpunished. The most significant one is the global financial crisis itself, whose key actors went unpunished for their rampant dirty dealings despite a plethora of evidence. This includes the top brass at Lehman Brothers, who rushed to sell their stock as the company was collapsing — all because prosecutors failed to prove intent under existing laws.
Related: How an anonymous trader made $192M shorting one of the biggest crypto crashes
In the years that followed, the SEC reportedly opened more than 50 investigations into derivatives markets, including insider trading involving credit default swaps and the potential effect on the Greek government bond crisis of 2009-2012. But no convictions were forthcoming. And that is thanks, at least in part, to the fact that the law didn’t cover debt derivatives. And the shocking part is that, in the US at least, it still doesn’t.
There have been very few revisions to insider trading regulations globally. Nearly a century since they were first introduced under the US Securities Exchange Act of 1934, the changes implemented have been more of a hindrance than a help. In the US, Rule 10b5-1, introduced in 2000, created a loophole for insider trading rather than fixing it, and any updates have failed to address today’s vastly more sophisticated market landscape.
A good example is the 2016 SEC v. Panuwat case, which tested the boundaries of insider-trading law so much that it took eight years to reach a conviction. Matthew Panuwat, a senior executive at Medivation — a biotech firm acquired by Pfizer — bought call options in rival Incyte Corp after learning about the takeover. His bet that the rival’s shares would rise led to a personal profit of over $100,000.
The SEC is ignoring insider trading
While Panuwat was eventually convicted, this so-called “shadow trading” remains a nascent area of enforcement for the SEC, and it’s technically still not written into law. But it should be. The laws as they stand aren’t fit for purpose in a market that looks nothing like it did 50 years ago, so it’s time for an upgrade.
That means officially extending the scope of the law to encompass a wide range of investment instruments, including derivatives and digital assets, and updating the definition of insider information to include government channels, policy briefings and other means. It also means strengthening pre-disclosure and cooling-off periods for public officials and aides, similar to existing 10b5-1 reforms.
Furthermore, enforcement needs to become significantly faster. Eight years for a conviction is nowhere near good enough in a world where billions can be lost within seconds.
Regulators need to come down hard on insider trading with full force, using the modern tools that fraudsters turn against them.
The crypto market is certainly no exception. It’s high time the powers that be investigated token launches, exchange listings and the deals fueling the digital asset treasury fever. Honest actors in the space would only welcome this.
Prosecuting this as a crypto-specific problem, however, would be a big mistake. Until the law is modernized and loopholes are closed, insiders will continue to exploit them, and trust in the system will remain eroded.
Only when wrongdoers start fearing the consequences of their actions will things truly change, both in traditional and digital asset markets.
Opinion by: Nic Puckrin, founder of CoinBureau.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.