Cryptocurrency Market and Invisible Transactions: How Insider Information Is Changing the Rules of the Game

Have you ever noticed strange fluctuations in the market before major announcements? In recent years, this phenomenon has gained momentum, and it is called insider trading in the crypto world. What was once considered the biggest problem of traditional stock markets is now firmly rooted in the digital economy.

What is insider trading and why is it a problem

In short, insider trading is the buying or selling of stocks or securities based on private information not available to the general public. Individuals with access to such confidential information gain an unfair advantage over other investors.

In the US, the Securities and Exchange Commission (SEC) strictly regulates this activity. Although some forms of insider trading are legal — for example, when a CEO openly buys shares of their company after proper registration — most cases involving confidential information are considered fraud.

Interestingly, the law is not limited to company executives. In 1909, the U.S. Supreme Court already ruled that even a director who purchases shares based on undisclosed information commits fraud. Today, relatives, friends, or random people who learn secrets can also be held accountable. A classic example is a hairdresser who overheard a confidential conversation while working with a CEO, learned about the company’s annual profits, and decided to buy shares. This is insider information in action.

How it works in cryptocurrencies

The cryptocurrency market has long operated as a digital Wild West — unregulated and almost without oversight. This has created fertile ground for manipulation and dishonest operations using insider information.

If you are an active trader, you probably noticed schemes like:

• Whales and project founders often buy or sell huge volumes of tokens, manipulating prices
• Classic “pump and dump” schemes: a coin rises due to excessive buying and stirred-up news, then insiders collude and unload simultaneously at a predetermined time
• Exchange listings — information about an upcoming token listing on a leading platform is exploited
• Technical updates — details about upcoming forks and upgrades provide trading advantages

However, the decentralized nature of blockchain makes most operations transparent. The problem that has emerged during the industry’s development is quite acute. According to research from the University of Sydney, insider information appears in 27-48% of all cryptocurrency listings, despite increased regulation.

Real cases that shook the crypto market

Coinbase scandal: when access to information became a gold mine

In 2022, the SEC investigated a case involving former Coinbase product manager Isha Vakhi. He had access to information about which cryptocurrencies would be added to the platform. Vakhi regularly passed this insider information to his brother and friend, and they, without delay, bought at least 25 cryptocurrencies (nine of which were securities) with a profit of over $1.1 million. Isha was sentenced to two years in prison, his brother to 10 months, and the other was ordered to pay a fine of over $1.6 million.

Long Blockchain: when a name change made all the difference

In 2017, a little-known company, Long Island Ice Tea, suddenly changed its name to Long Blockchain Corp. and announced a transition to blockchain technologies. This was during the crypto craze, and the rebranding caused a jump in stock prices by 380%. However, the company never actually started developing blockchain solutions. Three individuals who used insider information about the announcement before its public disclosure were convicted. Fines totaled $400,000.

OpenSea: NFT market at the center of scandal

In 2021, OpenSea product manager Nate Chastain used his knowledge of which NFT collections would be featured on the platform’s homepage. He purchased these collections in advance and sold them during a sudden spike in their value and trading volumes. The profit amounted to $57,000, but Chastain was sentenced to three months in prison and fined $50,000.

What penalties await insider traders

Penalties for using insider information can be much harsher than they seem:

• Imprisonment: up to 20 years depending on the amount of profit gained and criminal history
• Criminal fines: up to $5 million for individuals, up to $25 million for corporations
• Civil fines: up to three times the profit gained
• Disqualification: the person may be barred from serving as a director of a public company
• Public condemnation, damaging reputation industry-wide
• Seizure: return of all obtained funds and assets

How regulators are responding to the challenge

The SEC is increasingly classifying cryptocurrencies as securities. XRP, ADA, SOL, and many other tokens are already subject to this classification, which means direct application of insider trading rules.

SEC Chairman Gary Gensler repeatedly emphasizes: if a company raises money through a token, and investors expect profits from the company’s activities, then it is a security, and all relevant regulations apply.

Centralized exchanges have already implemented mandatory KYC and AML checks. However, decentralized platforms (DEX) remain a weak link. Pressure on them is growing to introduce stricter control mechanisms.

Interestingly, Binance even offered a reward of up to $5 million for reporting insider operations on the exchange — this happened after a scandal involving a crypto kitty that purchased 314 million BOME before listing on the platform.

The future: insider information in the crosshairs

Despite its reputation as an anonymous technology, blockchain is actually quite transparent for analysis. Its transparency can be used for monitoring and preventing manipulation. Research by Solidus Labs showed that 56% of ICO listings exhibit signs of insider trading, but regulatory pressure is increasing.

The industry is changing. Major players in crypto exchanges and companies understand that self-regulation is not an option but a necessity for the triviality of their business and reputation. The era of uncontrolled crypto markets is ending, and those who use insider information should understand: law enforcement is already in the game.