In TradFi, there are countless examples of indictments against individuals who have committed “insider trading”, where they have used non-public knowledge to gain an advantage in the buying and selling of assets. This activity is illegal in the traditional finance world, however examples have been seen of insider trading in cryptocurrency. Below, we look at some examples of this practice in the Web3 space, and its legal implications.
OpenSea executive Nate Chastain was charged on June 1, 2022 with wire fraud and money laundering by the FBI in which he is accused of using non-public knowledge to purchase NFT’s before they were featured on OpeanSea’s homepage. According to the DOJ’s press release, Chastain hid his fraud by making these purchases using anonymous digital currency wallets and anonymous OpenSea user accounts.
Charging documents allege that Chastain laundered at least 45 NFTs in 2021, each time selling them for two to five times what he had just paid for them. The actions were compared to frontrunning and insider trading, activities in which an individual profits off of non-public information. Law enforcement comments indicate that those laws will apply just the same.
Using CertiK’s SkyTrace, we can observe how the fraud took place.
Here we can see some of the transactions by EAO 0xa3a4548b39DA96Eb065FF91811cA30da40431C0D, which we know belongs to Nate Chastain due to his CryptoPunk NFT. We can see multiple examples of how Chastain sent funds to Wallets to purchase NFT’s before they were featured on OpenSea, and once they were featured, selling them for a profit and transferring them back to his public wallet.
However, Nate Chastain may be the first to be indicted for insider trading of Web3 assets, he is not the only person accused of committing the practice in the NFT space.
Another recent example of insider trading of NFT’s is the Starcatchers incident. Suspicions first began when a select few items were bought way above floor price. The first, #1755 was bought for 1.5 ETH when the floor price was 0.8 ETH. The wallet had not previously traded any other NFTs and was potentially created with the purpose of snatching this NFT from another buyer. The NFT was sold immediately for 30 ETH following the reveal.
The same wallet bought #3948, #6760, and #2237 which were purchased for 1 ETH, 0.899 ETH, and 1.37 ETH respectively. These three NFTs were then sold after reveal for 10 ETH, 4 ETH, and 3 ETH respectively. After tracking down the funds, MetaMehdee (@mehdeegbr) discovered that the profit from all these accounts was transferred to a Binance account that had received multiple deposits from the cofounder and main artist beutrec’s wallet/vault.
Due to these accusations, Beutrec was removed from an NFT project called Boki following the Starcatchers incident. However at the time of writing, no criminal proceedings have been brought to the NFT artist.
Coins and tokens that are listed on popular exchanges such as Binance, Coinbase and FTX Exchange often rise in value following announcements of their listing. This can be seen with tokens such as KOM, MITX and BDP on Coinbase. However, prior knowledge of such an announcement gives unethical actors a chance to get ahead.
The Wall Street Journal claims that an insider trader took advantage of the listing of Gnosis on Binance. They claim that an EOA purchased $360k worth of Gnosis on 24 Aug 21, six days prior to the announced listing on the crypto exchange. The token raised in value from $300 to $410 due to the listing announcement.. According to the WSJ, “the wallet began selling down its stake, liquidating it entirely in just over four hours for slightly more than $500,000—netting a profit of about $140,000”.
In response to insider trading claims, the CEO of Binance asked anyone to submit evidence of the practice to a whistleblower email address and expressed a zero tolerance in any such behaviors.
We have not been able to independently verify claims made by the WSJ, however you can read the article here.
@ScruFFuR on twitter provided evidence of insider trading within Coinbase, particularly in relation to the listing of Pawtocol (UPI) & Aventus (AVT). On-chain evidence points to a wallet that was created on 26 Jan 22 that purchased $336k in Tether which was used to acquire UPI and AVT.
Whilst the trader didn’t profit as much from AVT, they did from UPI which soared 63% following the announcement. As a result of the trade, the wallet profited $734k. What makes this case suspicious is that the wallet was created explicitly to purchase UPI and AVT prior to the Coinbase announcement. The exchange denied insider trading by stating:
“Coinbase restricts all employees from trading the tokens it is considering for listing to make sure no one at Coinbase is front running assets, even if they don’t work on our asset listings team.”
However, due to the fact a newly created wallet buying two specific tokens shortly before the Coinbase listing, it is likely that someone was able to use non-public knowledge to profit. You can see the activity of this wallet on Etherscan for yourselves: https://etherscan.io/address/0xd97f3289692807236e71203398879fb9d9902397
Unfortunately, public representatives are also accused of insider trading relating to the Web3 space. GOP congressman Madison Cawthorn has been implicated in a potential insider trading scandal with the meme coin Let’s Go Brandon. The accusation relates to NASCAR driver Brandon Brown announcing on 30 Dec 21 that LGB would be the primary sponsor of his driving season which caused the coin to spike 75%. Rep. Cawthorn was quoted as saying “LGB Legends… Tomorrow we go to the moon!” on 29 Dec 21 after purchasing between $100k-$250k on 21 Dec 21, which he disclosed on 27 May 22. The problem arises due to his personal ties with James Koutoulas, who created LGB.
Rep. Cawthorn is facing a House Ethics Committee probe into the exact nature of his investment in LGB due to the accusation that he used non-public knowledge to gain an edge with his personal investments.
Examples of insider trading in TradFi relating to the Web3 world have also taken place.
Formerly known as Long Island Iced Tea Corp, the rebranding of the company to Long Blockchain Corp sent the share price to increase more than 380% in December 2017. However, the SEC sued three individuals who it accused of having insider knowledge and as a result traded ahead of the rebrand.
Eric Watson, who drove the business change, is accused of informing Oliver Barret-Lindsay, a Cayman Islands broker who in turn tipped off an individual named Gannon Giguiere. The two are believed to have made $160k in illegal profits. This is a good example of how individuals in TradFi look to make illegal profits from the Web3 space.
South Korea is one of a handful of nations that is moving to regulate the Web3 world in an effort to protect investors against traditional Financial crimes such as insider trading. The Financial Services Commission in charge of regulating financial markets is looking to introduce the Digital Asset Basic Act (DABA).
DABA will look to regulate exchanges and punish them if they fail to comply with the country’s Capital Markets Act, the legislation that regulates securities. Furthermore, firms and users issuing cryptocurrencies will have to submit whitepapers, with further information on executives, how funds were obtained and associated risks.
South Korean officials have, however, been accused of committing insider trading activities back in 2018. Choi Hyung-Sik, the then governor of the Financial Supervisory Service (FSS), an organization that supervises the financial industry in South Korea, confirmed that individuals within the body used insider knowledge to profit from their crypto investments. Having known that the government was going to introduce regulation for crypto exchanges, individuals began to sell their crypto assets ahead of the announcement.
You may be thinking, “So what? These people took advantage of the situation they were in and produced oversized Alpha… I don’t see a problem”. It’s important to remember that this unethical and immoral behavior will only deter mass adoption, encourage scammers and give regulators ammunition for cracking down on the crypto space. Why would individuals want to begin joining Web3 ecosystems when they're at risk of being taken advantage of due to the activities of a select few with non-public information?
Along with our audits, CertiK also offers a KYC service where our highly skilled team research all aspects of a project, including a detailed investigation of the individuals behind a token which is what sets us apart from the rest. Head over to our Leaderboard and see which projects hold our KYC badge to assist you to DYOR in investing.